DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : A.Satya Vani Kumari
Designation : Lecturer
Branch : Commercial & Computer
Practice
Institute : Govt. Poly. For Women,
SURYAPET.
Year/Semester : III Year / V Semester
Subject : Business Economics –I
Subject Code : CCP-502
Topic : Markets
Duration : 50 Mts.
Sub Topic : Pricing under oligopoly
Teaching Aids : power point, animation

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Objectives

On completion of this period you would be able to :

 Explain Pricing under Oligopoly

 Describe Effects of Oligopoly

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Recap

At the beginning of this topic, “MARKETS” we have

discussed about:

Features of Oligopoly Market.

 Few sellers
 Lack of uniformity and certainity
 Price rigidity
 Influence of advertising

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PRICING UNDER OLIGOPOLY – KINKED
DEMAND CURVE

The kinky demand curve or average revenue

curve is made up of two segments.

1. The relatively elastic demand curve.

2. The relatively inelastic demand curve.

(Represented in Fig.17)

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CCP502.69 5
Graph explanation
 At the given price ‘OP’, there is a kink at point ‘K’
on the demand curve ‘DD’.

 ‘DK’ is elastic demand segment, ‘KD’ is inelastic

demand segment.

 Implies abrupt change in the slope of the demand

curve.

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 Before the kink point, demand curve is flatter after
the kink it becomes steeper.

 The oligopolist simply follow the prevailing price

and does not make any change in the price
because of kinked demand curve which leads to
indeterminateness.

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1. If he raises prices, sales would fall as the demand
is more elastic.

2. If he lower the price, he has to face immediate

retaliation from rivals.

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 Kinked demand curve accounts for kinked average
revenue curve.

 Kinked average revenue curve implies

discontinuous marginal revenue curve. (MA – BR)
(Fig : 18).

 Kinky marginal revenue curve explains the

phenomenon of price rigidity in Oligopoly prices.

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CCP502.69 10
OBSERVATIONS FROM FIG.18 (A) & (B)

1. Once a general price level is reached in an

oligopoly market either by collusion or price
leadership or through some other form, the price
remains unchanged over a period of time. This
implies price rigidity.

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 The price rigidity arises because of :

1. Interdependence of firms for price and output.

2. Discontinuity of marginal revenue curve due to

kinked demand curve implies a gap at the current
price and output level.

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 The oligopolist determines price and output by equating
Marginal Revenue with Marginal Cost.

 But, on account of discontinuous marginal revenue curve

at equilibrium point of price, the price - output
combination remains unchanged though marginal cost
may change.
(Represented in Fig.18 (B)

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 In Fig.18 (B) Marginal Cost (MC) Curve of the firm
fluctuates within the range of the gap in the MR
Curve without disturbing the equilibrium price and
output position of the firm.

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Effects of oligopoly

1. Smaller output and higher prices:

As compared with perfect competition , oligopoly
restricts output and charges higher prices.

2. Prices exceed average costs:

Due to restrictions for entry of new firms the prices
fixed under oligopoly are higher than average costs.
In other words, economy’s productive capacity is
not utilised in conformity with the consumer
preferences.

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3. Lower efficiency:
No tendency for optimum utilisation of plant of the
firm ,so, the firms do not attain maximum economic
efficiency.

4. Selling costs:
For snatching markets from their rivals, the oligopoly
firms spent more on sales promotion, like
advertising, changing packing design etc., are
regarded as wastes because they do not add to the
consumer satisfaction.

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5. Wide range of products:
Oligopoly firms offer wide range of commodities for
sale , it promotes consumer welfare.

6. Welfare effect:
As firms have no tendency to utilize maximum
capacity, average cost is higher , price is higher
than AC & MC , extensive expenditure on sales
promotion. Because of the above reasons ,
oligopoly firms charge fares fairly badly, which
reduces economic welfare.

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Conclusion

Oligopoly shows poor performance from all

angles and does not consider economic welfare of
neither consumers nor participants.

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Remedies for overcoming evils or
effects of oligopoly
Government regulation is necessary:

a) To pull down barriers to entry of new firms.

b) To prevent collusions to maintain prices, to restrict

supply.
c)To break big firms or to prevent them from
becoming bigger.

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Summary

In this class we have discussed about:

 Pricing under oligopoly

 Effects of oligopoly

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Examination questions

1. How price is determined under Oligopoly market

and state the effects of oligopoly and its
remedies?

2. Does the kinked demand curve offer a

satisfactory explanation of price-output decisions
under Oligopoly.

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