Oligopoly

Dr. Jayaram Nayar

Director, TKM Institute of Management
India
 AC

Minimum
Long Run AC Efficient Scale
to lower costs
A needed.
Minimum
Efficient Strategic entry
Scale barriers

Brands
entrenched
Collusion and Cartel

Firms benefit by collusion

if they are few firms
if there is an identical product and
 there is stability of demand and costs
Prices can be fixed or output can be fixed
 KINKED DEMAND CURVE
 A kinked demand curve shows that price rises will not be
matched by competitors but price reductions will be
matched
 It explains the price rigidity nature of oligopoly firm’s
demand curve.
 Demand curve of a firm is a 2 part demand curve –
having different elasticities- one for upward price moves
(elastic); one for price moves down.
 Average revenue or demand curve has a kink at the
point the firm operates.
Problems of the Kinked Demand Curve

 Positives
 Strategic interdependence of firms- Potential or expected
responses
 Model predicts stability in pricing
 Negatives
 Demand curve does not explain how stable prices are arrived at
 It merely explains stability of price
 Strategic interdependence is not fully explained
 Game Theory

 Will strategic interaction lead to competition or cooperation between

rivals?
 Different players have different pay offs associated with different strategic
options
 Two firms (players) could start a price war and could compete against
each other or cooperate with each other.
 Strategic options
 Each combination has different outcomes or pay offs for the two firms
Prisoner’s Dilemma

Shiv
Dreamer Silent Silent Cheats Partner

Dreamer – Shiv- Short Dreamer Shiv – free

Short stint stint Long
Term

Cheats Dreamer Shiv- Long Dreamer Medium

Partner free Term

Shiv Medium
Sentence
 Prisoner’s Dilemma

 Cheat and compete with each other or cooperate.

Firm A
Firm B Cooperate Cooperate Price War
50:50 20:60
Price War
60:20 30:30
NASH EQUILIBRIUM

Each player does what he thinks is best for

himself given what the rivals may do in response
A dominant strategy is a player’s best response
whatever its rival decides
Cournot Model

 Each firm tries to maximize its TR or total profits assuming

that the other firm will hold its output constant. With this
assumption , here will be a moves and counter-moves
by each firm until each firm sells exactly 1/3 of the total
amount of market production that would be sold if the
market had been perfectly competitive
Stackelberg Model

It examines a first mover advantage – it is

similar to the Cournot model but firms do
not make strategic decisions
simultaneously
One firm makes its decisions first
Bertrand Model

In determining its best level of output each firm

assumes that the other holds its price (rather
than its output) constant
Price Leadership Model

Imperfect collusion: where the other players

follow the leader in setting the price- it can be
the dominant market share holder or the lowest
cost setter
This is an informal practice