PowerPoint Presentation

Oligopolyis a market structure or an industry characterized by:few sellers and many buyerseither a homogeneous or a differentiated product(ex. Cars are differentiated products produced in an oligopolistic market)difficult market entry/ significant barriers to entry

few sellersbulk of market supply is in the hands of a relatively few large firms who selltheir products to many small buyersOligopoly is a consequence of mutual interdependence, a condition in which an action of onefirm may cause a reaction from other competing firms in the industry

homogeneous or differentiated productsproducts offered by suppliers maybe identical or, more commonly, differentiatedfrom each other in one or more respectsdifferences maybe physical, functional features, or purely imaginary

difficult entrythere are barriers to entry which make it very difficult for new firms to enterand compete in the marketexamples of barriers include:control over essential resourceexclusive financial requirementspatent rightseconomies of scaleKinked Demand Curvebasically, the demand curve for the product of oligopolists has two segments:one is elastic and the other is inelastic.Assumption for kinked demand curve: if a single firm lowers price, other firms will follow,But if a single firm raises price, other firms will not followIncrease in demand will be minimal

Oligopoly usually exhibits the following features:product branding each firm in the market is selling a branded (differentiated) product

entry barriers significant entry barriers into the market prevent the dilution of competitionin the long run it is possible for many smaller firms to operate on the periphery of an oligopolistic market,but none of them is large enough to have any significant effect on market prices and output

interdependent decision-making interdependence means that firms must take into accountlikely reactions of their rivals to any change in price, output or forms of non-price competition.

non-price competition competitive strategies as follows:free deliveries and installationextended warranties and credit facilitieslonger opening hoursbranding of products and heavy spending on advertisingextensive after sales serviceexpanding into new markets plus diversification of the product rangePrice leadershipanother type of oligopolistic behaviour when one firm has a clear dominant position in the market and firms with lowermarket shares follow the pricing changes prompted by the dominant firmTacit collusionoccurs when firms undertake actions that are likely to minimize competitive response(avoiding price cutting or not attacking each others market)

Explicit collusionprice fixing agreements or cartelsaim of this is to maximize joint profits and act as if the market was a pure monopoly

Price fixingan attempt by suppliers to control supply and fix price at a level close to the levelwe would expect from a monopolyproducers exert control over market supplyPossible break-down of cartelsenforcement problemseach individual member of the cartel finds it profitable to raise its own productionfalling market demandthis creates excess capacity in the industry and puts pressure on individualfirms to cut prices to maintain their revenue

successful entry of non-cartel firms in the industry