OLIGOPOLY

AND ITS
PRICING
STRATEGIES

Rajnidhisiya37@outlook.com
[COMPANY NAME]
OLOGOPOLY
AND
PRICING
STRATEGIES

SUBMITTED BY:
MONAM UPADHYAYA
MBA/45009/19
RAJ NIDHI
MBA/45017/19
SUBMITTED TO:
DR. MONIKA BISHT
Definition of oligopoly
An oligopoly is an industry dominated by a few large firms. For
example, an industry with a five-firm concentration ratio of greater
than 50% is considered a monopoly.
Features of oligopoly

 Interdependence of firms – companies will be affected by how

other firms set price and output.
 Barriers to entry. In an oligopoly, there must be some barriers
to entry to enable firms to gain a significant market share.
These barriers to entry may include brand loyalty or economies
of scale. However, barriers to entry are less than monopoly.
 Differentiated products. In an oligopoly, firms often compete
on non price competition. This makes advertising and the
quality of the product are often important.
 Possibility of collusion- collusion takes place within an industry
when rival companies cooperate for their mutual benefit.
Collusion most often takes place within the market
structure of oligopoly, where the decision of a few firms to
collude can significantly impact the market as a whole.
Types of oligopoly

1.Pure or Perfect Oligopoly:

 If the firms produce homogeneous products, then
it is called pure or perfect oligopoly. Though, it is
rare to find pure oligopoly situation, yet, cement,
steel, aluminium and chemicals producing
industries approach pure oligopoly.
2. Imperfect or Differentiated Oligopoly
 If the firms produce differentiated products, then
it is called differentiated or imperfect oligopoly.
For example, passenger cars, cigarettes or soft
drinks. The goods produced by different firms have
their own distinguishing characteristics, yet all of
them are close substitutes of each other.
3. Collusive Oligopoly:
 If the firms cooperate with each other in
determining price or output or both, it is called
collusive oligopoly or cooperative oligopoly.
4. Non-collusive Oligopoly:
 If firms in an oligopoly market compete with each
other, it is called a non-collusive or non-
cooperative oligopoly.
POSSIBLE OUTCOMES FOR OLIGOPOLY

 Stable prices (e.g. through kinked demand curve)

– firms concentrate on non-price competition.
 Price wars (competitive oligopoly)
 Collusion- leading to higher prices.

The kinked demand curve model

This model suggests that prices will be fairly stable and

there is little incentive for firms to change prices.
Therefore, firms compete using non-price competition
methods.
 This assumes that firms seek to maximise profits.
 If they increase the price, then they will lose a
large share of the market because they become
uncompetitive compared to other firms. Therefore
demand is elastic for price increases.
 If firms cut price then they would gain a big
increase in market share. However, it is unlikely
that firms will allow this. Therefore other firms
follow suit and cut-price as well. Therefore
 demand will only increase by a small amount.
Therefore demand is inelastic for a price cut.
 Therefore this suggests that prices will be rigid in
oligopoly
 The diagram above suggests that a change in
marginal cost still leads to the same price, because
of the kinked demand curve.  Profit maximisation
occurs where MR = MC at Q1.
PRICE WARS
 Firms in oligopoly may still be very competitive on
price, especially if they are seeking to increase
market share. In some circumstances, we can see
oligopolies where firms are seeking to cut prices
and increase competitiveness.
 A feature of many oligopolies is selective price
wars. For example, supermarkets often compete
on the price of some goods (bread/special offers)
but set high prices for other goods, such as luxury
cake.
COLLUSION
 Another possibility for firms in oligopoly is for
them to collude on price and set profit maximising
levels of output. This maximises profit for the
industry.
In the above example, the industry was initially
competitive (qc and pc). However, if firms collude, they
can agree to restrict industry supply to q2, and
increase the price to p2. This enables the industry to
become more profitable. At qc, firms made normal
profit. But, if they can stick to their quotas and keep
the price at p2, they make supernormal profit.
Collusion is illegal, but tacit collusion may be hard to
spot.
For collusion to be effective, there need to be barriers
to entry.A cartel is a formal collusive agreement. For
example, OPEC is a cartel seeking to control the price
of oil.

TYPES OF PRICING STRATEGIES

General strategies
 Profit maximisation. One strategy is to ignore

market share and try to work out the price for

profit maximisation. In theory, this occurs at a
price where MR=MC. In practice, it can be difficult
to work this out precisely.
 Sales maximisation. Aiming to maximise sales

whilst making normal profit. This involves selling at

a price equal to average cost.
 Gaining Market Share. Some firms may have a
target to increase market share, this could involve
setting prices as low as they can afford, leading to
a price war. A similar concept to sales
maximisation.

Pricing strategies to attract customers / increase

profit

 Premium pricing. This occurs when a firm makes a

good more expensive to try and give the
impression that it is better quality, e.g. ‘premium
unleaded fuel’, fashion labels.
 Loss Leaders This involves setting a low price on
some products to entice customers into the shop
where hopefully they will also buy other goods as
well. However, it is illegal to sell goods below cost,
so firms could be investigated by OFT.
 Price Discrimination. This involves charging a

different price to different groups of consumers to

take advantage of different elasticities of demand.
There are different types of price discrimination
from first degree to third degree.
 Reference Pricing. This involves setting an

artificially high price to be able to later offer

discounts on previously advertised price.
 Retail price mechanism RPM – when

manufacturers set minimum prices for retailers,

e.g. net book agreement.
 Premium decoy pricing. Where a firm sets the
price of one good deliberately high to encourage
demand for a lower price. e.g. a car company may
bring out a top of the range sports car, which is
very expensive to make the general brand more
attractive.
 Pay what you want. A situation where consumers
are left free to decide how much to pay, e.g.
restaurants cafe where there is no cost – only
tipping. When music companies release a new
recording and ask for donations.
 Bundle pricing. When a firm gives special offers,
e.g. buy 3 for the price of 2 – very common for
book sales e.t.c.
 Price skimming. When a firm releases a new

product, it initially sets a high price to take

advantage of those consumers with inelastic
demand. Over time, the price is reduced to attract
those customers with more price elastic demand.

Penetration pricing. When a firm sets a low price

to help establish market share and get established.
For example, a new printing company may offer
very low price for its printers to get established.
Then it gets to make profits on selling ink and over
time increase the price. Or satellite tv company
offering introductory offer for a few months.
 Optional pricing. When a firm tries to receive a
higher price by selling extras. For example, if you
buy a DVD, you can get sold insurance or
additional features.
 Dynamic pricing. When prices are regularly
updated in response to shifting market conditions.
For example, if an airline receives high demand for
certain flights, it will increase the price to help fill
up other departure times and maximise revenue
from the flight.