Oligopoly Final 2

8/8/2019 Oligopoly Final 2

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bahauddin zakariya university,multan sub campus

sahiwal

MBA 3rd SEMESTER

SESSION[2009-12]

MANAGERIAL

ECONOMICS

ASSIGNMENT TITLE :

MARKER STRUCTURE [OLIGOPOLY]

SUBMITTED TO :

MAM NAZIA ASHRAF

SUBMITTED BY :

GROUP # 05

MBS-09-36 SAJJAD AHMAD

MBS-09-38 UZMA IKRAM

MBS-09-39 ZUBIA KHAN

MBS-09-40 SHAHID ZUBAIR

MBS-09-41 NAJMAALMAS

[ T y p e t h e c o m p a n y a d d r e s s ]


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MANAGERIAL ECONOMICS 2 MARKER STRUCTURE (OLIGOPOLY)

GROUP # 05 MBA3RD SEMESTER

WHAT DOESOLIGOPOLY MEAN

[DEFINITION]

[A situation in which a particular market is controlledby a small group of firms is called oligopoly.]

[2010]

GROUP # 06[MBA 3RD SEMESTER]

[SESSION 2009-12]


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WHAT DOES OLIGOPOLYMEAN?

An oligopolistic market is the one which is dominated by some large suppliers. In

an oligopolistic market, the leading firms account for a large percentage of market share.

Firms manufacture branded products and high competition among them results intremendous advertising and marketing spends by these firms. Leading forms are able to

make abnormal profits in the long run, as new firms have numerous entry barriers. As all

firms in an oligopolistic market are interdependent, they need to consider impact and

reactions on other firms while determining their own pricing and investment policies.

Homogeneous products, mutual interdependence, few large producers and high entry

barriers in oligopolistic competition.

A situation in which a particular market is controlled

by a small group of firms is called oligopoly.

An oligopoly is much like a monopoly, in which only one company exerts control

over most of a market. In an oligopoly, there are at least two firms controlling the market.

For example:

The retail gas market is a good example of an oligopoly because a small numberof firms control a large majority of the market. The car automobile industry is a very

good example of an oligopolistic market. There are various competitors in this market

but the dominant ones include General Motors, Honda, Chrysler, Toyota and Ford. Entry

barriers prevent other entrants and pricing is mostly by competition and mutual

understanding between top manufacturers.

OLIGOPOLY, CHARACTERISTICS:

The three most important characteristics of oligopoly are:

1. An industry dominated by a small number of large firms,

2. Firms sell either identical or differentiated products, and

3. The industry has significant barriers to entry.



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i. Homogeneous (Identical) Product Oligopoly:

This type of oligopoly tends to process raw materials or produce intermediate

goods that are used as inputs by other industries. For examples are petroleum, steel,

and aluminum.

ii. Differentiate Product Oligopoly:

Goods manufactured in these kinds of markets are for personal consumption.

Consumers need a variety of products, as they have different needs and wants.

Examples include computers, household products and automobile industry. A few

examples of differentiated oligopolistic industries include automobiles, household

detergents, and computers.

3. Barriers to Enter in The Marker:

Firms in an oligopolistic industry attain and retain market control through barriers

to entry. The most noted entry barriers are:

(1) Exclusive resource ownership,

(2) Patents and copyrights,

(3) Government restrictions, and(4) High start-up cost.

Barriers to entry are the key characteristic that separates oligopoly from

monopolistic competition on the continuum of market structures. With few if any barriers

to entry, firms can enter monopolistically competitive industries. However, with

substantial entry barriers found in oligopoly, firms cannot enter the industry as easily and

thus existing firms maintain greater market control.

Consider the hypothetical oligopolistic Shady Valley athletic shoe market

dominated by OmniRun, Inc. and The Master Foot Company . Each of these firms has

produced athletic shoes for several years. They have well-known brand names, state-of-

the-art factories that provide economies of scale for large volumes of production, and a

few patents on how their shoes are made.



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Any firm seeking to enter this market is faced with significant barriers.

First, a new firm must compete with the established Fleet Foot and

OmniFastbrand names.

Second, a new entry has to construct a new factory. With limited initial

sales, this new firm in the market will be unable to take full advantage of

decreasing short-run average cost or long-run economies of scale.

While a new firm could enter this oligopolistic market, such a task is significantly

more difficult than entering an industry with fewer barriers.

K I N K E D D E M A N D C U R V E U N D E R O L I G O P O L Y :

An oligopolist faces a downward sloping demand curve but the elasticity may depend on

the reaction of rivals to changes in price and output. Assuming that firms are attempting

to maintain a high level of profits and their market share it may be the case that:

(a) Rivals will not follow a price increase by one firm - therefore demand will be

relatively elastic and a rise in price would lead to a fall in the total revenue of the firm.

(b) Rivals are more likely to match a price fall by one firm to avoid a loss of marketshare. If this happens demand will be more inelastic and a fall in price will also lead to a

fall in total revenue.



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The kink in the demand curve at price P and output Q means that there is a discontinuity

in the firm's marginal revenue curve.

If we assume that the marginal cost curve in is cutting the MR curve then the firm is

maximising profits at this point.

In the bottom diagram, we see that a rise in marginal costs will not necessarily

lead to higher prices providing that the new MC curve (MC2) cuts the MR curve at the

same output. The kinked demand curve theory suggests that there will be price stickiness

in these markets and that firms will rely more on non-price competition to boost sales,

revenue and profits.



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CRITICISM ON KINKED DEMAND CURVE:

Sweezy kinked demand model is criticized, the points at which this theory is

criticized are as follows:

This model does not explain the price and output decision of the firm

It does not define the level at which price will be set o order to maximize profits.

Kinked demand theory does not explain the level of price at which the kink will

occur.

The kinked demand hypothesizes does not explain the height of the kink.

This model explains the short-run behaviour of the firm.



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ADVANTAGES OF OLIGOPOLY:

There are some advantages of oligopoly, which are as follows:

i. As compared with pure competition or pure monopoly, differentiated oligopoly

places at the consumers disposal a wider range of commodities. To this extent, it

promotes consumers welfare.

ii. Firms are able to reap economies of scale, due to large scale competition.

-Products cannot be produced by individual firms on a small scale.

iii. There is an incentive to engage in Research & Development.

-They have the ability to earn super normal profits and capture larger market

share

iv. Firms enjoy lower costs due to technological improvement.

-This results in higher profits which will improve firm's capacity to withstand

price war.

DISADVANTAGES OF OLIGOPOLY:

There are some disadvantages of oligopoly, which are as follows:

i. small output and high prices

ii. Lower efficiency

i. small output and high prices:

As compared with perfect competition, oligopoly results in the restriction

of output and charging of higher prices.

ii. Lower quality product:

In the oligopoly there are chances of low quality of the products because

there is little bit monopoly system because in the oligopoly there is corporation



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between some organizations so they can set their price by their own and can

decrease the quality of the product.

Oligopolies in a market have problem that the firm have extensive amounts of

power and may even collude to set prices, which is illegal. For the consumer this means

high prices accompanied by the possibility of a low quality product. It could be argued

that it ends up being a less competitive market.

CONCLUSION:

Oligopoly shows poor performance from all angles. For the participants ot is an

awkward organization, because they can neither avail of individual opportunities as in

perfect competition nor building up un efficient money-making organizations as inmonopoly. It is also unresponsive to market changes because

a. They are not interested in short-run condition.

b. They are anxious not to spoil their mutual relations for a temporary

advantage.



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PRACTICAL EXAMPLES:

There are some examples of organizations that are working as oligopolistic

market.

1. CANADA base d organizations:

Three companies (Rogers Wireless, Bell Mobility and Telus) share over 94%

of Canada's wireless market.

Rogers Wireless operates:

Rogers Wireless operates in a big neighborhood. Canada's

leading mobile carrier ahead of such rivals as Bell Mobility and TELUS, the

company provides wireless voice, messaging, and Internet services to about 8

million customers over its network. Rogers Wireless is the only Canadian

carrier with a cellular network based on the GSM (global standard for mobile

communications) platform. It also derives some revenue from sales of prepaid

voice service, as well as mobile devices from such vendors as Nokia and LG.

The company operates throughout Canada and has offices in Calgary, Halifax,

Montreal, Toronto, Vancouver, and Winnipeg. Rogers Wireless is a

subsidiary of Rogers Communications.

Sales ofRogers Wireless operates the current year is $0.1M

Bell Mobility:

First in Canada with a cellular network, Bell Mobilityis in a nip-

and-tuck struggle for the top wireless carrier spot. The company provides

mobile voice, data, and broadband Internet services to about 6 million

customers, primarily in eastern Canada, under the Bell Mobility and Solo

Mobile brands. It also markets services in other regions under the Virgin

brand through subsidiary Virgin Mobile Canada which operates in partnership

with Virgin Group. The company's products and services are made available

through a network of dealers and retail outlets, including its own TotalCom



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stores. Bell Mobility accounts for about one-quarter of sales for its parent

company BCE, Canada's largest telecommunications company.

Sales ofBell Mobility for the current year is $634.4M

TELUS:

TELUS banks on the fact that its customers have something to

say. One of Canada's top telecom service providers, the company is the

incumbent local-exchange carrier in British Columbia, Alberta, and eastern

Quebec. TELUS provides wireline voice services to more than 4.2 million

customers and Internet access to about 1.2 million. The company's wireless

unit serves about 6.2 million mobile phone customers nationwide with voice,

data, and mobile Internet services. Through its TELUS TV unit, it offers high-definition TV, video-on-demand and pay-per-view television, and personal

video recorder (PVR) services. TELUS also provides businesses with

consulting, network management, and other IT services.

Sales: $9,153.6M

One year growth: 16.0%

Net income: $951.0M

Income growth: 3.1%

2. UNITED KINGDOM (UK) based organizations:

Four companies (Tesco, Sainsbury's,Asda and Morrisons) share 74.4%

of the grocery market.

The detergentmarket is dominated by two players, Unileverand Procter

& Gamble.

UNILIVER

Either of two linked companies, Unilever PLC (based in London)

and Unilever NV (based in Rotterdam). They are the holding companies for

more than 500 firms worldwide that manufacture and sell soaps, foods, and

other products. The modern Unilever was established in 1929 as an

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association between the British manufacturer Lever Bros. and several other

European soap and margarine manufacturers. Today most Unilever sales are

in household products, including soaps and detergents, margarines, cooking

fats, dairy products, toiletries, and packaged and processed foods. The group

also produces paper and plastic products, industrial chemicals, and animal

feeds.

Sales: $57,117.2M

One year growth: (3.4%)

Net income: $7,449.2M

Income growth: 22.4%

The Procter & Gamble:

Company (P&G) boasts boatloads of brands. The world's top

maker of household products courts market share and billion-dollar names.

It's divided into three global units: household care, beauty and grooming, and

health and well-being. The company also makes pet food and water filters and

produces a soap opera. Some two-dozen of P&G's brands are billion-dollar

sellers, including Fusion, Always/Whisper, Braun, Bounty, Charmin, Crest,Downy/Lenor, Gillette, Iams, Olay, Pampers, Pantene, Pringles, Tide, and

Wella, among others. P&G shed its coffee brands in 2008. Being the

acquisitive type, with Clairol and Wella as notable conquests, P&G's biggest

buy in company history was Gillette in 2005.

Sales: $78,938.0M

One year growth: (0.1%)

Net income: $12,736.0M

Income growth: (5.2%)



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BIBLIOGRAPHY:

http://www.investopedia.com/terms/o/oligopoly.asp

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly,+charac

http://www.buzzle.com/articles/oligopoly-characteristics.html

http://www.blurtit.com/q2774865.htm

http://www.blurtit.com/q435484.html

http://tutor2u.net/economics/content/topics/monopoly/kinked_deman

d.htm

K.K. DEWET, MODERN ECONOMIC THEORY, DIAMOND JUBLEE

EDITION, YEAR OF PUBLISH 2005
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly,+characteristicshttp://www.buzzle.com/articles/oligopoly-characteristics.htmlhttp://www.blurtit.com/q2774865.htmhttp://www.blurtit.com/q2774865.htmhttp://www.buzzle.com/articles/oligopoly-characteristics.htmlhttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly,+characteristics

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