Department of Management Studies Indian Institute of Technology Delhi Hauz Khas, New Delhi – 110016 • Greek words: Oligos + Polis = Oligopoly (few + sellers) • Market situation characterized by existence of a few major producers/sellers, with no limitation on total number of firms • Decisions of any major seller have significant impact on others
• Types of Oligopoly : – Pure Oligopoly: Unique Price – Differentiated Oligopoly: Price in a narrow range
• Product homogeneity vs differentiated products
• Unique price vs price differentials
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Price Rigidity: Kinked Demand Curve Increase in price: not followed by others (resulting in decline in market share) Decrease in price: followed by others (eventually resulting in no gain in market share) Clever advertising or addition of a new product may also increase sales (resulting in decline in others’ market shares) Criticism: How price was originally determined
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Cournot Model: Interdependence
• Developed in early 1800s by French Mathematician
• Useful insight into industries with smaller number of
sellers
• Cournot Duopoly
• Cournot Model within Firms
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Collusive Oligopoly • An important factor influencing a market’s structure is the degree of cooperation among the firms. When firms cooperate completely, they engage in collusion. This term denotes a situation in which two or more firms jointly set their prices or outputs, divide the market among them or make other business decisions jointly. • A cartel is a formal organization of some major firms, producing similar products, that work together to raise prices and restrict or reduce output. • National level cartels usually barred by law • International Cartel: OPEC
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Cartels & Collusion Nature of Organization & Collusion • Organized, Collusive Oligopoly • Centralized cartel & market sharing cartel • Unorganized, Collusive Oligopoly • Price leadership by low-cost firm • Price leadership by dominant firm • Barometric Price Leadership (Price change due to clear & well understood reason such as substantial change in excide duty, fuel price hike etc.) • Unorganized, non-collusive oligopoly • Independent action of firms
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Barriers to Entry
• Advantage that existing firms have over potential
competitors (J.S. Bain, 1956)
• Entry cost as barrier to entry (G.J. Stigler, 1968)
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Non-price Competition – Mature Industry
– Satisfaction to consumers from alternative brands is quite
similar
– Different brands are very close substitutes
– Price differential is likely to shift substantial demand in
favor of lower priced brand
– Major competitors decide to compete with each other on
all other aspects and not on ‘price’
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Causes of Price Wars 1. New producer/seller sells at a lower price than the existing one
2. Existing producer/seller wants to revive lagging
sales by reducing the price
3. There are surplus stocks & limited storage
capacity
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Explanation of Oligopolistic Price Rigidities 1. Industry is a mature one
2. If one firm lowers price, others will follow or
undercut it (to retain their market shares)
3. If one firm increases price, then other firms will
not follow.
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Industry No. of Major Firms Tractor 10+ Vanaspati 30+ Caustic Soda 20+ Commercial Vehicles 15+ Cement 40+ Soaps 20+ Sugar 30+ Edible Oil 50+