Professional Documents
Culture Documents
Unit 4 Oligopoly
Unit 4 Oligopoly
Learning Outcome
• Introduction: https://www.youtube.com/watch?
v=TdGNBdWyY94
OLIGOPOLY
– Barriers to entry
– Price War
– Non-pricing strategies
– Interdependence
Which of the following is not true about Oligopoly?
A.Single seller
B.Price war
C.Selling cost
D.Entry barrier
Which of the following is an example of Oligopoly?
A.Railways
B.Agricultural products
C.Airlines
D.None of these
OLIGOPOLY
1. First assumption: If an oligopolist reduces its price, its rivals will follow and
cut their prices to prevent losing the customers.
P*
dd
DD
Q* Quantity
OLIGOPOLY (cont.)
This shows the price At this range of MR, any The kinked demand
rigidity in the oligopoly change in the MC does not curve below Point E
market. reflect changes in the profit creates a gap in the
Price (RM)
maximizing price and MR, which is indicated
output. by the dotted line ab.
MC1
MC2
E
P*
b DD
Q*
MR Quantity
Duopoly
• Nature of product
• Cost structure
• Characteristics of sales
Informal and Tacit Collusion
• India ranks second in the world in cement production. The cement industry
is highly fragmented as its faces tremendous pressure on price realization.
The demand for cement is price –elastic. Any imbalance in the demand and
supply leads to a disproportionate increase in the price. Based on the
season, the price is determined by the supply. When the cement
manufacturers increase their capacities, the enhanced capacity leads to
excess supply. As the supply is more than demand, cement prices fall and
demand picks up, leading to an increase in price.
• Since cement production is highly capital-intensive, profit margins are low.
The declining profit margins have prompted cement companies to form
cartels. For example, five big players in the industry cut production by 10%
and managed to increase profit by 50%.
• There are two important factors affecting cement production, namely,
sales tax benefits, and the direct cost incurred in production. Sales tax
incentive varies from state to state. Tamil Nadu offers sales tax exemption
for seven years and the payment can be deferred up to 14th year. Gujarat
offers exemption from sales tax for seven years. Based on the cost
structure and the freight and packing charges, the firm arrives at its profit
or loss. The price and supply of cement in a particular state is fixed by local
cartel. Profit margin depends upon incentives, direct costs, and decisions
of the cartel. The cartel decides the floor price and the sales volume for
individual members in a region. Normally, cement cartels do not last into
the long run; cartelization is more of a short-run phenomenon.
• What are the reasons for the formation of cartels in the cement industry?