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St. Mary’s University School of Graduate Studies
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INTRODUCTION
The term oligopoly is derived from two Greek words, Olego’s and 'Pollen'. Olego’s means a “few” and Pollen means to “sell”. Oligopoly is a market structure where fewer firms dominate the market. The products they are producing may be standardized or differentiated; examples of the first type are steel, chemicals and paper, while examples of the second type are cars, electronics products and breakfast cereals. The most important feature of such markets that distinguish them from all types of market structure is that firms are interdependent. Strategic decision like price and output made by one firm affects other firms profit and output, which react to them in a ways that affect the original firm. Thus, firms have to consider these reactions in determining their own strategies. Such markets are extremely common for both consumer and industry products, both in individual countries and on a global basis. There is a considerable amount of heterogeneity within such markets. Some feature two dominant firms, like Coca-Cola and Pepsi in soft drinks; some feature half a dozen or so major firms, like airlines, mobile phones or athletic footwear; and others feature a dozen or more firms with no really dominant firms like car manufacturer, petroleum retailers, and investment banks. Of course in each case the number of major firms depends on how the market is defined, spatially and in terms of product characteristics. The exact number of firms in the industry is less important than the ability of any single to cause a change in the output, sales and price in the industry as a whole. Because of these characteristics, oligopoly is further from perfect competition than in monopolistic competition.
CHARACTERISTICS OF OLIGOPOLY
Interdependence
The firms under oligopoly are interdependent in making decision. They are interdependent because the number of competition is few and any change in price & output etc by a firm will have a direct influence on the fortune of its rivals, which in turn retaliate by changing their price and output. Therefore, firms tend to act together. Sometimes the interdependence behavior takes the form of collusion, a formal agreement, to set prices or to otherwise behave in a cooperative manner. One form of collusion is price fixing, agreeing to change the same or similar prices for a product through so called price leadership or other practices that ameliorate competitive pressures. Perhaps the best known examples of collusive behavior is a cartel which is a formal agreement between producers to allocate market share and/or industry profit. In almost every case these prices are higher than those determined under competition. No firm can fail to take
Non price competition
When there are only a few firms, they are normally afraid of competing with each other by lowering the prices; it may start a price war and the firm who starts the price war may ultimately loose. To avoid price war, the firm uses other ways of competition like: customer care, advertising, frees gifts etc. Such a competition is called non-price competition. Under perfect competition and monopoly expenditure on advertisement and other measures is unnecessary. But such expenditure is the life-blood of an oligopolistic firm.
Indeterminateness of demand curve
The interdependence of the firms makes their demand curve indeterminate. When one firm reduces price other firms also reduces. Thus the demand curve loses its definiteness and thus is indeterminate as it constantly changes due to the reaction of rival firms.
. MODELS OF OLIGOPOLY
The four popular models of firm behavior in oligopolistic industries are the sweezy (“kinked demand curve) model, the cournot model, the Bertrand model, and the stackelberg model
The Sweezy Model (Kinked Demand Curve Model)
This model was originally developed by Sweezy13 and has been commonly used to explain price rigidities in oligopolistic markets. A price rigidity refers to a situation where firms tend to maintain their prices at the same level of changes in demand or cost conditions. The model assumes that if an oligopolist cuts its prices, competitors will quickly react to this by cutting their own prices in order to prevent losing market share. On the other hand, if one firm raises its price, it is assumed that competitors do not match the price rise, in order to gain market share at the expense of the first firm. In this case the demand curve facing a firm would be much more elastic for price increases than for price reductions. This results in the kinked demand curve
Stackelberg Model
The Stackelberg model assumes that one firm will behave as in the cournot model by taking the output of its rivals as constant, but that the rival incorporate this behavior into its production decisions.
The basic assumptions underlying the Stackelberg model are as follows:
1. There are few firms and many buyers.
2. The firms produce either homogeneous or differentiated products.
3. A single firm, the leader, chooses an output before all other firms choose their outputs.
4. All other firms, as followers, take the output of the leader as given.
5. Barriers to entry exist.
6 All firms aim to maximize profit, and assume that the other firms do the same
BIBLIOGRAPHY
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2011 Oligopoly competition in the market with food products. Faculty of Economics and Management, Czech University of Life Sciences, Prague, Czech Republic
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Vishal Singh, Ting Zhu
2006 Pricing & Market Concentration in oligopoly markets.
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2005 Managerial Economics: A problem solving approach. Cambridge University Press. http://www.cambridge9780521819930
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2008 Managerial Economics and Financial Analysis. BS Publications 4-4-309,Giriraj Lane, Sultan Bazar, Hyderabad-500 095-A.P.