4.2.

3 Oligopoly Market:

The term Oligopoly is derived from two Greek words 'Oleg's' means few and 'Pollen'
means to sell.

It is defined as a form of imperfect market where there are a few firms ( i.e. 2 to 10
sellers) in the market, producing either homogenous or heterogeneous products.

Characteristics of Oligopoly :-
1. Interdependence
2. Importance of selling cost
3. Group Behaviour
4. Indeterminateness of demand curve
5. Price Rigidity
Difference between Collusive and Non-collusive Oligopoly:-

In case of collusive oligopoly, firms might decide to collude together and not compete
each other. The firm would behave a single monopoly and aim at maximising their
collective profit rather than individual profits.

In case of non-collusive oligopoly, the firms do not collude and instead compete with
each other. Each firm aims to maximise its own profits and decides how much
quantity to produce assuming that the other firms would not change their quantity
supplied.

Non-Collusive Oligopoly:

A. Prof. Paul Sweezy Concept of Kinked Demand Curve :-

According to the kinked demand curve hypothesis, the demand curve facing an
oligopolist is not a straight line but has a kink at the level of the prevailing price. It is
because the prices are rigid and that firms will face different effects for both
increasing price or decreasing price.

1. The segment above the prevailing price level is highly elastic.

2. The segment below the prevailing price level is inelastic.
The following figure shows a kinked demand curve dD with a kink at point P.
In the figure, the prevailing price level = P , the firm produces and sells output = OM.
The upper segment ( i.e. dP) of the demand curve is elastic and the lower segment ( i.e.
PD) of the demand curve relatively inelastic.
The kinked demand curve hypothesis is based on the assumption of an asymmetry in
the rivals reaction in oligopoly with respect to a price increase and a price decrease.

Equilibrium situation:-

B. Chamberlin's Model of Stable Equilibrium:- ( Small group model)

Chamberlin's model can be understood through a duopoly (i.e. Two firms A and B)
market context.
The market demand is a straight line with negative slope. If firm A is the first to start
production it will produce the profit-maximizing output 0X M and sell it at the
monopoly price PM. Firm B, under the assumption that the rival A will retain his
quantity unchanged, considers that its demand curve is CD and will attempt to
maximize its profit by producing one-half of this demand, i.e. quantity XMB (at which
B’s MR = MC = 0).

As a consequence the total industry output is OB and the price falls to P. Now firm A
realizes that its rival does in fact react to its actions, and taking that into account
decides to reduce its output to OA which is one-half of OXM and equal to B’s output.

The industry output is thus OXM and price rises to the monopoly level OPM. Firm B
realizes that this is the best for both of them and so will keep its output the same at
XMB = AXM. Thus, by recognizing their interdependence the firms reach the
monopoly solution. Under the assumption of equal costs, the market will be shared
equally between A and B. ( i.e. OA = AXM).