oligopoly markets
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“IN CRITICAL MOMENTS EVEN THE VERY POWERFUL
HAVE NEED OF THE WEAKEST”
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MARKETS
• ………is a situation where buyers and sellers
come in contact with each other for buying and
selling goods and services at a particular price
at a point of time.
Two Parties
Commodity or Services
Price
Time
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Market as per competition
• Pure or Perfect competition
• Imperfect competition
(1) Monopolistic Competition
(2) Oligopoly—Duopoly
• Monopoly
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Market as per competitionMarket as per competition
Perfect
Competition
Imperfect
Competition
Monopoly
Monopolistic
Competition
Oligopoly Duopoly
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Oligopoly Competition
• Few sellers and many buyers• Homogenous – Pure oligopoly
Heterogeneous—Imperfect oligopoly
• Firm is a “Price-Searcher”• Barriers to entry
• Interdependency of sellers
• Price rigidity• High selling– cost
• Example: Automobile, Mobiles, Communication
network, steel, cement etc
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Duopoly Competition
……The Simplest form of oligopoly.
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Forms of Oligopoly
Non-Collusive Oligopoly Collusive Oligopoly
•Cournot’s Model•Bertnard’s Model•Stackelberg’s Model•Chamberlin’s Model
•Sweezy’s “Kinked DemandModel”
Cartels
Price Leadership
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Collusive Oligopoly
1. Cartels aiming at Profit
Maximization
2. Market-Sharing Cartels
1. Low- Cost Firms
2. Dominant Firm
3. Barometric
CartelsPrice Leadership
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Collusive Oligopoly
• One way of avoiding the uncertainty
arising from oligopolistic interdependence
is to enter into collusive agreements.Cartels and Price Leadership are the two
types of Collusive Oligopoly. Both forms
generally imply tacit (secret) agreements,since open collusive action is commonly
illegal in most countries at present.
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Collusive Oligopoly
• Although direct agreements among theoligopolistic are the most obvious
examples of collusion, in the modern
business world trade associations,professional organizations and similar
institutions usually perform many of the
activities and achieve in a legal or indirectway the goals of direct collusive
agreements.
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Cartels• Cartels imply direct (although secret)
agreements among the competing firms.
1. Cartels aiming at Joint-Profit Maximisation:
Here the firms are looking at maximisationof the industry profit. The firms appoint a
central agency to which they delegate the
authority to decide not only the total quantity
and the price at which it must be sold so as to
attain maximum group profit, but the allocation
of production among the members of the
cartel...
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Cartels conti….
…and the distribution of the maximum joint profitamong the participating members. In practice
cartels rarely achieve maximum joint profits on
account of various reasons like mistakes in
estimation of market demand, MC, slow
process of cartel negotiations, the bluffing
attitude of some member, free of Government
interference, they wish to have a good publicimage, free of entry and keeping freedom
regarding design and selling activities.
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Cartel
2. Market Sharing Cartels:This form of collusion is more commonin practice because it is more popular. Thefirms agree to share the market, but a
considerable degree of freedom concerningthe style of their output, their selling activitiesand other decisions.
There are two basic methods of sharing the market:
a. Non-price Competition and
b. Determination of Quotas.
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Cartels
a. Non-Price Competition Agreements:In this form of ‘loose’ cartel the member firms agree on a common price, at which eachof them can sell at any quantity demanded.
The price is set by bargaining must be suchas to allow some profits to all members. Thefirms agree not to sell at a price below thecartel price, but compete on a non-pricebasis. They are free to vary the style of their product and/or their selling activities such acartel is more unstable and may lead to a
price-war with only the fittest surviving.
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Cartels
b. Sharing of market by Agreement and Quotas:
The second method for sharing the market is theagreement on quotas i.e., agreement on the quantitythat each member may sell at the agreed price (or prices). These quotas may be decided on the basis of
past levels of sales, and/or the basis of ‘productivecapacity’. A major factor here becomes the bargainingpower and skill. Another popular method of sharingthe market is the definition of the region in which eachfirm is allowed to sell. In this case, of geographical
sharing of the market, the price as well as the stylemay differ. However, even a regional split of themarket is inherently unstable as the low-cost firmsalways have the incentive to reach out to adjacentmarkets.
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Price Leadership
• In this form of coordinated behaviour of oligopolist one firm sets the price and othersfollow it. Because it is advantageous to them or because they prefer to avoid uncertainity about
their competitors reaction even if it impliesdeparture of the followers from their profitmaximising position. Price leadership iswidespread in the business world. It may be
practiced either by explicit agreement or informally. In nearly all cases, price leadershipis tacit, open collusive agreement are illegal in
most countries.
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Price Leadership
• Price leadership is more widespread thancartels, because it allows the members
complete freedom regarding their product and
selling activities as compared to a completecartel. If the product is homogeneous and the
firms are highly concentrated in a location, the
price will be identical. However, if the product is
differentiated prices will differ, but the direction
of their change will be the same, while the
same price differentials will broadly be kept.
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Price Leadership
1. Price Leadership by a low-cost firm.2. Price Leadership by a large (Dominant) Firm:
This refers to the firm having the
considerable share of the total market.
3. Barometric Price Leadership:
The firm chosen as the leader is considered
as a barometer, reflecting the changes in economic
environment. Usually it is a firm which from pastbehaviour has established a reputation of a good
forecaster of economic changes. A firm belonging to
another industry may also be chosen as the barometric
leader.
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The March of Global Oligopolist
• No longer are corporations
satisfied to be the largest or the
next-to-the-largest nationalcompany in their industry or
sector. They are looking at the
entire globe are mergers.
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Paul Sweezy’s Kinked Demand
Curve
DD
dd
P
QoX
Output
P r
i c e
Y
P1
E<1
E>1
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MEANING
• CARTEL: A manufacturers' agreement or
association formed to control marketing
arrangements, regulate prices, etc.
• COLLUSIVE: An agreement between two
or more people
• TACIT: Implied without being openly
expressed or stated; understood, inferred.