EconomicsPower pointPresentation.

oligopolyTtopic:

Introduction • The term oligopoly is derived from two Greek words.• “Oligi” which means few “Polien” means to sell..• It is a competition between two big sellers each one of them selling either homogeneous or differentiated products.

The nature of oligopoly“A market form where there are only a few firms in the industry but there are many buyers”

•Oligopoly is a particular market which is controlled by a small group of firms.

•There is a high degree of interdependence between firms.

•In oligopoly there are at least two firms controlling the market.

Features of oligopolY• Large number of buyers but only few sellers• Product may be differentiated or standardised• Buyers are small relative to market but sellers are large.• Firms have market power derived from barriers to entry.• Profit maximization conditions.•Ability to set price.• Advertising.

Oligopolistic Competition.It is a situation where oligopoly describes a market dominated by few large firms ,. examples:Soft drinks CarsMusicCereal.

Classification of oligopoly .

On the basis of products ,they are classified

into pure oligopoly and differentiated oligopoly.

On the basis of possibility of entry of firms,oligopolies may be classified into oligopolies with free entry or oligopolies

with closed entry of firms.

Based on price leadership:The oligopoly can be classified as “partial” and “full” oligopoly.a)Partial oligopoly:when a large firm in market is recognised as price leader , the other small firms in the market follow the price fixed by the leader firm.b)Full oligopoly: where there is no leading firm to determine the price of a product in the market , the firm may be engaged in price competition in case of full oligopoly.

Price leadership model..Price leadership model is a feature of oligopolistic situation,where one firms

assumes the role of leader and fixes the price of a product.

Price leadership can be seen when most of all firms in the industry decide to sell

their product at a price fixed by one among them.

The leader may be the biggest firm in the industry or it may be a firm with lowest

cost of production.Independent pricing by each firm is rarely

seen in the oligopolistic situation.

Types of price leadership model.

price leadership of the dominant firms.

Barometric price leadership

Aggressive price leadership.

Features of price leadership model:

o The firm has a considerable , share in the total market supply.oThe firm is a reputed one for fixing a suitable price.oThe firm has initiative in taking timely action after considering various factors.oThe firm has a relative cost advantage which given it a supremacy among the various firms in the industry.

OLIGOPOLY –KINKED DEMAND CURVE MODEL:

The most popular model of oligopoly is the kinked demand curve model . This model is an explanation for price rigidity. The kinked demand curve helps to explain why price rigidity will exist in oligopoly even without collusion among firms. The demand curve as ordinarily defined is inapplicable to oligopoly . Each firm in oligopoly estimates the amount it can sell at various prices making arrival for the probable reactions of its rivals….

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B O M X

The demand curve facing an oligopolist has a kink at the levels of the prevailing market..

The prevailing market price is MP . If the Oligopoly raises his price above MP, then thereWill be substantial reduction in his sales.When a firm raises the price, its rivals do notRaises their prices hence there will be a Substantial reduction in the sales of the firmWhen it raises its price . Hence AP of demand Curve is more elastic. If the oligopolist reduces the price below MO in order to increase his sales his rivals retaliate.Hence the firm cannot increase its sales by price reduction . Thus the segment PB of the demand curve is inelastic.

SWEEZY’S VERSION OF KINKED DEMAND CURVE:

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MC BO X MR

Sweezy’s version of kinked demand curve states that oligopoly price is what it is . It does not explain and bring out the force of equilibrium .It does explains stability of oligopoly price and not the determination of oligopoly price. The kinked demand curve shows Oligopoly interdependence firm.In the diagram the marginal Revenue is positive in the elastic Strength of demand curve AP. it is negative in the inelastic Position

The stability in price and output is explained bby kinked demand curve hypothesis.

THE KINKED DEMAND CURVE MODEL OF OLIGOPOLY ASSUMES THAT:

•Response to a price increase is less , than response to a price decrease.

•Elasticity of demand is constant regardless of whether price increases or decreases.

•Elasticity of demand is perfectly elastic if price increases and perfectly inelastic if price decreases.

CRITICISM/DRAWBACK:THE KINKED DEMAND CURVE MODEL HAS BEEN CRITICISED ON SEVERAL ACCOUNTS.

•THE MODEL DOES NOT EXPLAIN HOW THE FIRM ARRIVE AT THE KINK IN THE FIRST PLACE.

•THERE ARE ALSO SOME OTHER VALID EXPLANATIONSPRICE RIGIDITY SUCH AS,NATIONALLY ADVERTISED PRICES ,CATALOUGED PRICES..

Conclusion:

In conclusion we can opine that mutual interdependence among firms and price rigidity are two

typical features in oligopoly market . Although the firms are

rival they are mutually interdependent . Hence price competition is significant in

oligopoly market.