Managerial Economics
Ch-4: 4-Olgopoly Models
By: Dr. Solomon Getachew
Email:
[email protected] Oligopoly
Oligopoly refers to a form of imperfect competition
where there will be only a few sellers producing either
homogenous (identical) as in a perfectly competitive
market or differentiated as in a monopolistically
competitive market
No explicit number of firms is required for oligopoly,
but the number usually is some where between 2 and
10.
Oligopoly
Little or no product differentiation and there is some level
of control over price determination.
Firms under this market structure will discuss and come up
with the final price for their products.
Oligopolies are price setters rather than price takers
- Barriers to entry are high
- Buyers have only imperfect knowledge as to price, cost
and quality.
Oligopoly
Sellers may charge the same price but there will be
difference in the way they advertise and attract customers
to purchase their products.
If the demand for product increases the organization’s
response for the increased demand will be hiring more
workers and produce with full capacity.
Oligopoly
If the demand for the product decrease there will be
decrease in cash inflow of organization due to which
their costs will exceed than their profit. Thus, they will
cut jobs of their employees to cut their costs.
Pros and cons of Oligopoly
• Only a handful of companies hold most of the market, then
lack of competition often creates a lack of innovation.
• On the other hand, can reduce the amount of choice that
consumers receive.
• The extra profits earned from an oligopoly can go into
research and development. Eg: pharmacies
• It can bring price stability to the market.(even though its
not the price customers are looking for, it will still help
them to plan; reduce surprises)
Oligopoly
Oligopoly: the number of competing organizations is
relatively less, making the competitors in a dominant
position. Entry barrier to the market is relatively high,
which ensure that the existing players in the market
remain in dominant position.
Duopoly: Duopoly can be defined as a specific type of
oligopoly where only two producers with having
complete control of market exist in one market.
Ch-Ch of Oligopoly
1. Interdependence in decision making: Any change in
price, output, product, etc., by a firm will have a
direct effect on the fortune of its rivals.
Thus, an oligopolistic firm must consider not only the
market demand for its product, but also the
possible moves of other firms in the industry.
Pricing is a bit more complicated and it depends
upon the strategic interaction among the firms.
Ch-Ch of Oligopoly
2. Group Behavior: Firms may realize the importance of
mutual co-operation.
3. Price Rigidity: Another important feature of oligopoly
is price rigidity. Price is sticky or rigid at the prevailing
level due to the fear of reaction from the rival firms.
Market Structure and Price Decisions
In contrast, in the case of an oligopoly market, just a few
firms produce most or all of the market output, so any
one firm’s pricing policy will have a significant effect on
the sales of other firms in the market.
This interdependence of oligopoly firms means that
actions by any one firm in the market will have an effect
on the sales and profits of the other firms.
Pricing strategy and Marketing structures
Oligopoly
• An oligopoly describes a market structure which is
dominated by only a small number of firms. That results
in a state of limited competition. The firms can either
compete against each other or collaborate by doing so,
they can use their collective market power to drive up
prices and earn more profit.
Pricing strategy and Marketing structures
Oligopoly
• All firms Maximized profit, Could set a price, High
barrier to entry & exit, Some firms dominate the entire
market, Not computing with the price, Compete in
Adverting & product differentiated, Price Maker
OLIGOPOLY EXAMPLES
Mobile Phones
Apple, Samsung, and Huawei
own a combined market share
of over 50 percent of the entire
global market.
Music Entertainment
The top 5 firms: Universal
Music Group, Sony, BMG,
Warner, and EMI Group;
control close to 90
percent of the US market.
CONTD…
Motor Vehicles in US
Collectively, Ford, Chrysler,
General Motors, and Toyota;
have a collective market
share of close to 60 percent
in the US.
Example:
Suppose the inverse demand function for two Cournot duopolists is given by
P= 10-(Q1 + Q2)and their costs are zero.
1. What is each firm’s marginal revenue?
2. What are the reaction functions for the two firms?
3. What are the Cournot equilibrium outputs?
4. What is the equilibrium price?
Answer:
1. Using the formula for marginal revenue under Cournot duopoly, we find that
MR1(Q1, Q2) = 10 - Q2 - 2Q1 3. To find the Cournot equilibrium, we must
MR2(Q1, Q2) = 10 - Q1 - 2Q2 solve the two reaction functions for the
2. Similarly, the reaction functions are two unknowns: equating the above two
Q1=r1(Q2)= 10/2 – Q2 (1/2)=5-Q2(1/2) equations and get Q1 and Q2
Q2= r2(Q1)=10/2-Q1(1/2)= 5-Q1(1/2) 4. Total industry output is Q=Q1+Q2=20/3
P=10-(Q1+Q2)=10/3
