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Take–away of today’s lecture
Oligopoly
 Lecture Outcome

1. To make the student identify the scenario where

there are a few sellers and large number of buyers
 Lets recall

1. How will you differentiate monopoly and

monopolistic competition?
Oligopoly
Features of Oligopoly
1. Few number of sellers
2. Interdependence of sellers
3. Homogeneous products
4. Price rigidity
5. Entry and exit is difficult
6. Uncertainty of demand curve
Why the barriers exist???
1. Natural
◦ Scale economies
◦ Patents
◦ Technology
◦ Name Recognition
2. Strategic Action
◦ Flooding the market
◦ Controlling an essential input
 – The theory of the kinked demand curve is based on two
assumptions.

1. First assumption: If an oligopolist reduces its price, its rivals will follow and
cut their prices to prevent losing the customers.
2. Second assumption: If an oligopolist increases its price, its rivals do not
increase the price and keep their prices the same, thereby they gain
customers from the firm that increases the price.
Polling question
• Which of the market structure has unique demand
curve?
(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition
(d) Oligopoly
 Because of this According to the assumption, An oligopoly firm faces
assumption, an when the firm increases the two demand curve,
oligopolist faces kinked price (P*), no other firms will individual demand
Price demand curve. follow. Above P*, the firm will curve (dd) and industry
follow the dd curve. demand curve (DD).
If the firm decreases the price,
other firms will follow. Below
P*, the firm follow the DD
curve.

P*

dd

DD

Q* Quantity
 OLIGOPOLY (cont.)

This shows the price rigidity
in the oligopoly market.
Price (RM)
At this range of MR, any
change in the MC does not
reflect changes in the profit
maximizing price and output.
The kinked demand
curve below Point E
creates a gap in the
MR, which is indicated
by the dotted line ab.

MC1
MC2
E
P*

b DD

Q*
MR Quantity
 SUMMARY OF MARKET STRUCTURE

Perfect Monopolistic
Characteristics Monopoly Oligopoly
competition competition
Number of sellers
Large One Many Few

Identical or Unique or no Homogenous or

Type of product Differentiated
homogenous close substitution differentiated

Entry condition Very easy Impossible Easy Difficult

Control over
None Some Some Considerable
price
Local phone Automobiles,
Examples Wheat, corn Food, clothing
service, electricity cement
Profit
MR = MC MR = MC MR = MC MR = MC
maximization
 Perfect Monopolistic
Characteristics Monopoly Oligopoly
competition competition

Subnormal, Subnormal, Subnormal, Subnormal,

Short run
supernormal or supernormal or supernormal or supernormal or
equilibrium
normal profit normal profit normal profit normal profit

Normal profit due Supernormal Normal profit due Supernormal

Long run
to free entry and profit because of to free entry and profit because of
equilibrium
exit barriers to entry exit barriers to entry

S/run: AR<AVC S/run AR<AVC S/run: AR<AVC S/run: AR<AVC

Shut down
L/run: AR< AC L/run: AR< AC L/run: AR< AC L/run: AR< AC
Polling question
• When a perfectly competitive firm makes a decision
to shut down, it is most likely that
a. Price is below the minimum of average variable
cost.
b. Fixed costs exceed variable costs.
c. Average fixed costs are rising.
d. Marginal cost is above average variable cost.