Oligopoly

1. Pricing Under Oligopoly Prepared by Dr. K.V.Sasidhar

2. Pricing Under Oligopoly Oligopoly Meaning : Oligopoly has been derived from two Words oligi and pollien. ‘Oligi’ means a ‘few’ and ‘Pollien’ means ‘sellers’.

3. Oligopoly Definition Oligopoly is defined as a market situation in which there are a few sellers or producers dealing in either the homogeneous or differentiated products.

4. Classification of Oligopoly Oligopoly market can classified on following bases. Nature of product: on the basis of nature of products, Oligopoly is Classified as Pure and differentiated oligopoly. Pure oligopoly is one in case of which the product produced by the competing firms in the market is identical or homogeneous. Differentiated oligopoly is supposed to exist in the market, when the firms in the market produce and sell the non-homogeneous.

5. Classification of Oligopoly 2 . Entry of firms : On the basis of freedom of entry Oligopoly Market classified as ‘open’ and ‘Closed’ oligopoly. Open oligopoly : when the new firms are allowed to enter in to the market. It is called open oligopoly. Closed oligopoly : when the new firms are not allowed to enter in to the market. It is called open oligopoly.

6. Classification of Oligopoly 3. Price leadership: Based on Price leadership the oligopoly can be classified as ‘Partial ’ and ‘ Full ’ oligopoly. Partial oligopoly : when a large firm in the market is recognized as price leader, the other smaller firms in the market follow the price fixed by the leader firm. Full Oligopoly : Where there is no leading firm to determine the price of a product in the market. The firm may be engaged in price competition in the case of full oligopoly.

7. Classification of Oligopoly 4) Agreement or Collusion: The oligopoly market can be classified as ‘ Collusive ’ or ‘ Non collusive ’ on the basis of agreement or collusion among firms in the market. Collusive Oligopoly : When different firms in the oligopoly market have some informal or formal agreement about price, output, division of market, profit sharing etc. Non Collusive Oligopoly : When there is no agreement or collusion among the firms.

8. Classification of Oligopoly 5) Degree of Co-ordination : On the basis of degree of co-ordination the oligopoly market can be of the types of ‘ Organized ’ and ‘ Syndicated ’ oligopoly . Organized oligopoly : When the different firms in the market avoid price competition by organizing themselves into a central association for fixing price, output quotas etc. Syndicated oligopoly : All the firms in the market crate a syndicate or cartel which is a common selling organization for the sale of output turned out by all firms.

9. Characteristics of Oligopoly Few Sellers Control over supply Inter-dependence of firms Conflicting attitudes of firms. Lack of uniformity of size of firm Group behavior Advertising and selling costs Price rigidity Intense Competition Indeterminateness of demand curve

10. Non- Collusive Oligopoly Models 1) Augustin Cournot’s Model 2) Bertrand’s Model 3) Edgeworth’s Model 4) Stackelberg,s Model

11. Augustin Cournot’s Model Oligopoly was made by the French economist Augustin Cournot in 1839. is model rests upon the following main assumptions : There are Two firms in the market , A and B Each Firm owns the spring of mineral water which is identical. The cost of production is zero Each firm is faced with a linear, negatively sloping market demand curve.

12. Assumptions Continued….. 5. The productive capacity of each firm is unlimited. 6. Each firm considers itself to be independent in determining its price or output. It means the mutual interdependence is ignored. 7. Each firm assumes that the supply of rival firm will remain unchanged. Given the Set of assumptions, when ultimately long run equilibrium determined, each firm will share the market equally. Price will be zero because of zero cost of production and the long run equilibrium under perfect competition. The model is explained through Fig.

13. Thank You

14. Bertrand’s oligopoly Model The oligopoly (duopoly) model developed by Joseph Bertram in 1883 was a modification upon Cournot’s duopoly solution. Assumptions: 1 . There are Two firms in the market , A and B 2. Each Firm owns the spring of mineral water which is identical. 3. The cost of production is zero 4. Each firm have unlimited production capacity.

15. Assumptions: 5. Each firm considers itself to be independent in making the price – output decision. In other words, the mutual interdependence is ignored by them. 6. The most significant assumption in this model, on account of which it departs from Cournot’s solution is that each fierm belives that the price of rival firm remains constant.

16. Edgeworth’s model * In the field of Classical oligopoly(duopoly) analysis was made by F. Y. Edgeworth in 1857. * This model made a significant departure from the duopoly models given by Cournot and Bertrand. The Change in this model is E dgeworth’s assumption that the productive capacity of each firm in the duopoly market is limited.

17. Assumptions of the Model There are two firms , ‘A’ and ‘B’ The products of the two firms are homogeneous Both the firms have equal per unit cost. The productive capacity of each firm is limited. Both the firms sell their maximum possible output at the competitive price, where price becomes equal to average cost.

18. Assumptions of the Model 6. Each firm considers itself to be independent in making the price-output decision. It means the mutual interdependence is ignored by each of the firm. 7. Each firm assumes that the price of the rival will remain unchanged.

19. Stackelberg’s Duopoly Model This is an extension of Cournot’s Model The essence of Stackelberg’s model is the problem of leadership and followership. He assumed that the rival acts as his follower and tries to maximizes his profits, given the output decided by the leader. Stackelberg pointed out that each duopolist acting as a leader or follower would attempt to maximize his profits.

20. Stackelberg’s Duopoly Model