Oligopoly Market

Meaning

Oligopoly is a type of imperfect market. It has few firms capable of influencing the total supply in the market.

When two or more than two firm selling homogenous or differentiated products than oligopoly market is said to be exist.

Characteristics

Few seller/ producer Homogenous/ differentiated product Restriction to entry Advertisement Price control (Sticky/ Rigid) Kinked demand curve

Examples

Procter & Gamble, HUL for shop, shampoo, detergent etc…

Hero Honda, Bajaj, Yamaha, TVS, Kinetic all for two-wheeler….

Mobile contain service as well as Hand set with few players…

Petro-chemical Industry…

Oligopoly

Oligopoly is a market with only few seller, a key feature of it is the tension between cooperate and self-interest.

• Act as Monopolist• Producing Small qty• Charging price above MC• Ultimate get profit of

Monopoly

• Produce More qty• Charge less price• Ultimate lower profit

Eg: Amul & Sagar dairy

Table shows price & qty with revenue Collusion

An agreement among firms over production and price is known as collusion

CartelGroup of firms that get together for

taking decisions regarding price and qty is known as cartel

Form cartel to decide

Here Amul & Sagar collude & decide to produce total 60 gallon of milk @ Rs. 60 as Monopoly profit & qty.

Again both want to get max profit so both decide to produce 30 gallon milk each.

So profit will be 1800 Rs. To each.

Equilibrium for an oligopoly

Although oligopolist would like to form cartels and earn Monopoly profit.

But

Antitrust Laws prohibit agreement

Squabbling among cartel members over how to divide profit in market sometime make agreement impossible

Not form cartel to decide

Amul decide:

from 60 g

If produce 30 g @ 60 Rs. 1800 Rs.

If produce 40 g @ 50 Rs. 2000 Rs.

Similarly Sagar decide to produce 40 g

So, Total is 40+40=80 g @ Rs. 40

In a way profit to both firm will be,

produce 40 g @ 40 Rs. 1600 Rs Profit ultimately lower than the previous

one that is

If produce 30 g @ 60 Rs. 1800 Rs.

Reasons for lower profit

For self interest both have decide to produce the qty (80) that is more than Monopoly qty (60)

Due to high qty they charge lower price (40 Rs.) than monopoly price (60 Rs.)

Amul decide:

from 80 g

If produce 50 g @ 30 Rs. 1500 Rs.

is lower than previous one

If produce 40 g @ 40 Rs. 1600 Rs.

so here some kind of equilibrium reached by both of them to produce 40g

Nash equilibrium

It is situation in which economic participants interacting with one another each choose their best strategy given the strategies the other have choosen.

For e.g. Amul producing 40 g i.e. their best strategy.

Sagar producing 40 g i.e. their best strategy.

Conti…

Once reaching this condition (Nash equilibrium) neither Amul nor Sagar dairy has an incentive to make different decision.

Oligopoly

Oligopoly is a market with only few seller, a key feature of it is the tension between cooperate and self-interest.

• Act as Monopolist• Producing Small qty• Charging price above MC• Ultimate get profit of

Monopoly

• Produce More qty• Charge less price• Ultimate lower profit

How the size of Oligopoly affect the market Outcome

Suppose Mother dairy and Sugam dairy entered to the market,

All four player eitherForm Cartel, orNot form Cartel lead two kind of effect to

be occur– Output effect (O>P so production)– Price effect (O<P so Production )

Game theory and Economics of cooperation

Game theory is the study of how people behave in strategic situation

In oligopoly market firm must take decision strategically regarding production and profit gaining.

Conti…

Game theory is quite useful for understanding the behavior of oligopoly because

Competitive Market Monopoly Market Oligopoly Market

Conti…

Game theory in which particular game “Prisoner’s Dilemma” provides insight into the difficulty of maintaining cooperation, because cooperation in oligopoly make better off for everyone.

The Prisoner’s Dilemma

Ashish & Hardik are two criminals, who captured by the police.

They have committed two crimes Carrying unregistered gun

– Minor crime, enough evidence, (Spend a year in jail)

Bank robbery together– Major crime, lack of hard evidence

Conti…

“Right now, we can lock up you for a year. If you confess the bank robbery and implicate your partner, however we’ll give you immunity and you can go free. Your partner will get 20 years in jail.

But if you both confess to the crime, we won’t need your testimony and we can avoid the cost of a trial, so you will each get an sentence of 8 years.”

Conti…

Hardik gets 8 years Hardik gets 20 years

Hardik gets 1 yearsHardik goes Free

Ashish gets 8 years

Ashish gets 1 yearsAshish gets 20 years

Ashish goes Free

Hardik’s Decision

Ashish’s Decision

Confess Remain Silent

Remain Silent

Confess

Oligopolies as A Prisoner’s Dilemma

Amul gets 1600 Rs Amul gets 1500 Rs

Amul gets 1800 RsAmul goes 2000 Rs

Sagar gets 1600 Rs

Sagar gets 1800 RsSagar gets 1500 Rs

Sagar goes 2000 Rs

Amul’s Decision

Sagar’s Decision

High production: 40 g

High production: 40 g

Low production: 30 g

Low production: 30 g

Why sometime people cooperate

Prisoner’s Dilemma shows that cooperation is difficult but not impossible.

With example of AMUL DAIRY & SAGAR DAIRY (Play a game more time)

Thus, in game of repeated prisoner’s dilemma, the two players may be able to reach the cooperative outcome.

Public policy towards Oligopoly

Cooperation among oligopoly is undesirable from standpoint of society as a whole.

Policymaker always try to induce firms in oligopoly to compete rather than cooperate.

Restrain of trade and the Antitrust Laws Controversies over Antitrust Policy

– Resale Price maintenance– Predatory Pricing– Tying

Restrain of trade and the Antitrust Laws

Sherman Antitrust Act of 1890 Every contract in restrain of trade & commerce

among several state or with foreign countries declared to be illegal

They can be either punished by fine <50,000$ or can be given imprisonment of < 1 yr.

Clayton Antitrust Act of 1914 If a person can able to prove that he was damaged

by an illegal arrangement to restrain the trade, a person could sue & recover 3 times damaged he sustain.

Controversies over Antitrust Policy

Most commentators agree that price-fixing arrangement among competing firms should be illegal

Resale Price maintenance Predatory Pricing Tying

Like an agreement among members resale price maintenance prevent retailers from competing on price.

Resale Maintenance Price is the only way for firm to solve the free rider problem

Meaning e.g. Cybercafé

Some economist believe that predatory pricing is rarely, & perhaps never a profitable strategy

When any firm offer two of its product together at single price than it is said to be tying

E.g. Two Movies(Bad/good)

Thanking You…