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Price and Output Decision under Oligopoly

MEANINGOFOLIGOPOLY:
Anoligopolyis amarket formin which amarket
orindustryisdominatedbyasmallnumberofsellers.
Withfewsellers,eacholigopolistsislikelytobeaware
oftheactionsoftheothers.Accordingtogametheory,
the decisions of one firm therefore influence and are
influencedbythedecisionsofotherfirms.

DEFINITION OF OLIGOPOLY:
Oligopolyisdefinedasamarketstructureinwhichthereareafew
sellerssellinghomogeneousordifferentiatedproducts.
Asituationinwhichaparticularmarketiscontrolledbyasmallgroup
offirms.

Inwhichonlyonecompanyexertscontrolovermostofamarket.In

anoligopoly,thereareatleasttwofirmscontrollingthemarket.
Inthistherearetwopartsi.e..
HomogeneousOligopoly
HeterogeneousOligopoly

SOURCES OF OLIGOPOLY

1.
2.
3.
4.
5.

Huge Capital Investment


Economies of scale
Patent rights
Control over certain raw material
Merger and Takeover

1. Huge Capital Investment


Some industries are by nature capital-intensive, e.g.,
manufacturing automobiles, aircraft, ships, TV sets,
computers,mobilephones,refrigerators,steelandaluminum
goods,etc.suchindustriesrequirehugeinitialinvestment.

2. Economies of Scale:
By virtue of huge investment and large scale production, the large
units enjoy absolute cost advantage due to economies of scale in
production, purchase of industrial inputs, market financing, and scale
organization.

3. Patent rights:
In case of differentiated oligopoly, firms get their differentiated
product patented which gives them an exclusive right to produce and
marketthepatentedcommodity.Thispreventsotherfirmsfromproducing
thepatentedcommodity.

4. Control over certain raw materials:


whereafewfirmsacquirecontroloveralmosttheentiresupplyof
importantinputsrequiredtoproducingacertaincommodity,newfirms
finditextremelydifficulttoentertheindustry.

5. Merger and takeover:


Mergerofrivalfirmsortakeoverofrivalfirmsbythebiggeroneswith
view to protecting their joint market share or to put an end to waste of
competitionisworkinginmoderntimes,asanimportantfactorthatgives
rise to oligopolies and strengthens the oligopolistic tendency in modern
industries.

FEATURES OF OLIGOPOLY

Small number of sellers.


There is a small number of sellers
under oligopoly.
How small is the number of sellers in
oligopoly markets is difficult to specify
precisely for it depends largely on the size
of the market.

Industry

no. of firms

Total market share(%)

Ice-cream

100.00

bread

100.00

Milk food

99.95

Motor-cycles

99.95

Passenger cars

94.34

cigarettes

99.90

Fruit juice

10

98.21

Automobile tyres

91.37

Interdependence of decision making.

It is most striking feature of an oligopolistic


market structure.
Due to few firms under oligopoly brings
the firms in keen competition with each other.
The competition between the firms takes the
form of action, reaction and counter-action in
the absence of collusion between the firms.

Barriers to entry.
Barriers to entry to an oligopolistic industry
arise due to market condition such as:
Huge investment to match the production capacity of
existing firms.
Economies of scale and absolute cost advantage
enjoyed by the existing firms.
Strong consumer loyalty.
Preventing the entry of new firms.

Indeterminate price and output.


Another important feature of the
oligopolistic market structure is the
indeterminateness of price and output.
The characteristic fewness and
interdependence of oligopoly firms makes
derivation of the demand curve a difficult
proposition.

Continued
Therefore price and output are said to be
indeterminate under collusive oligopoly.
But, there too, collusion may last or it may
break down.
If price is once determined, it tends to
stabilize.

REFERENCES
Managerial economics 7th edition
D N Dwivedi published 2008
CMIE, industries and market share.
august 2000.
http://www.yourarticlelibrary.com/oligopolymarket/the-oligopoly-market-example-types-andfeatures-micro-economics/9140/

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