Oligopoly

Oligopoly Market Characteristics

Few sellers.
Homogenous or unique products.
Blockaded entry and exit.
Imperfect dissemination of information.
Opportunity for above-normal economic! pro"ts in long-run
equilibrium.
Examples of Oligopoly
#arbonated Beverage $arket %epsico & #oca #ola!' (omestic aviation
Industry in India Few %layers like Indian )irlines' *et airways'
+ing"s,er!.
In t,is form of market structure' t,e number of sellers is few suc, t,at a seller
can closely watc, w,at ,is co-selller is doing in terms of ,is price & output
and take t,at into consideration w,ile doing ,is own pro"t maximi-ation
exercise.
For instance. /et % 0 a 1 b2 be t,e market demand curve w,ere t,e
market is supplied by two sellers 3 & 4. 5,en market demand can
be expressed as
% 0 a 1 b 23624!. 7ow "rm8seller 3 will de"ne ,is pro"t function
as
9 0 5: 15# 0 %23 1 #3 0 ;a 1 b23624!<23 1 #3 .
5,us now wit, oligopoly' a seller=s pro"t function includes rival=s
output 24 as given' w,ic, was not t,e case in ot,er forms of
market. >imilarly it can also include %4 if sellers are competing
based on %rices and not on market s,are
5,is value of rival=s output 24! is arrived at by a seller by looking
at ,ow rival was selling in last period. He looks at t,e quantity or
price ,is rival was selling or c,arging in last period and assumes
guesses or con?ectures! t,at t,e rival will continue to do t,e same
in t,is period and based on t,is guess about 24 or %4' ,e
incorporates t,ese 24 or %4 in ,is pro"t function and maximi-es ,is
pro"t and determines ,is equilibrium quantity 23! to be sold and
price %3! to be c,arged.
5,e seller does not' ,owever' talk to ,is rival to understand exactly
w,at would be 24 or %4 . 5,is is t,e case of non-collusive oligopoly.
5,ere are several models of non-collusive oligopoly depending on
di@erent types of con?ectures8guesses t,at a seller makes about ,is
rival
Non-Collusive Oligopoly Models
#ournot (uopoly $odel 1 w,en a seller makes a guess about ,is rivals
output be,avior Ax. #oke and %epsi
Bertrand=s (uopoly $odel - w,en a seller makes a guess about ,is rivals
price be,avior Ax. 5imes of India and Hindustan 5imes
>tackelberg=s (uopoly $odel 1 w,en a seller is a market leader in t,e
sense ,e knows t,e demand and cost conditions of t,e market and also
knows t,at ,is rival will watc, ,is be,avior and take it into ,is decision
making. 5,is normally ,appens w,en a seller is a "rst-mover in t,e
industry. Ax. >ony in gaming industry.
>wee-y=s +inked demand curve $odel- guess of a seller is if ,e raises
price no co-seller will follow ,im but if ,e lowers price all co-sellers will
follow
Limitation of Non-collusive Oligopoly
7on-collusive form of oligopoly gives rise to a lot of uncertainty. Because entire
pro"t maximi-ation exercise of a seller is based on guess about rival=s be,avior.
If rival=s be,avior does follow w,at ,e guessed t,en ,is pro"t max exercise fails
to give t,e maximum pro"t.
5o avoid suc, uncertainty sellers in oligopoly market often move towards
#ollusive oligopoly by secretly colluding wit, co-sellers
Collusive Oligopoly
#artels 1 market s,aring' ?oint pro"t maximi-ation may be t,e ob?ective of
t,e cartel
$ergers 1 become one seller
%rice /eaders,ip 1 eit,er t,e dominant "rm or t,e low cost "rm will set t,e
price' ot,ers will follow it.
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