MANAGERIAL

ECONOMIC
S
DIVISION :
C
OLIGOPOLY GROUP.
ROLL NO. NAME
4301 YADAV MOHIT
4223 PARMAR KULDEEP
4182 HARSHAD BAVALIYA
4316 GUPTA RITIK.
4300 SONDHARVA ROHAN
4282 BAROT DIXIT.
4284 MAKWANA BHAVIN.
4190 CHAVDA VISHAL.
4281 SOLANKI MIHIR.
4311 KANDARP RATNOTAR.
 MEANING

• The term Oligopoly comes from the Greek words Oligos and Polis and means, literally,
few sellers. Oligopoly is a common form of market structure on modern economic
system.
• Oligopoly is a situation where a few large firms compete against each other and there is an
element of interdependence in the decision making of these firms. Each firm in the
oligopoly recognizes this interdependence.
• ‘‘ Any decision one firm makes will affect the trade of the competitors and so results in
countermoves. As a result, one’s competitor’s behaviour depends on one’s own behaviour,
and this must be taken account of when decisions are made.’’
•
Examples:
 CHARACTERISTICS OF OLIGOPOLY.

Number and size distribution of sellers – There is no precise limit on the

number of sellers that a market can have and still be characterized as an oligopoly.
Oligopoly involves only a small number of sellers.
 Product differentiation – Product may be either homogeneous or
differentiated. If the product is homogeneous, the market is said to be a pure
oligopoly. And if the product is not homogeneous, the market is differentiated
oligopoly.
 Conditions of entry and exit – Entry is difficult. With respect to condition
of entry, for an oligopolistic market structure to persist in the long run, there must
be some factor that prevents new firms from entering the industry.
Number and size distribution of buyers – Oligopoly involves an unspecified
numbers of buyers.
Existence of price rigidity – Since any change in price by an oligopolistic invites
countermoves from the rivals, the firm in oligopoly normally sticks to its price. If
a firm tries to reduce the price, its rivals will also do so and, thus, will not allow it
to take advantage of price reduction. If a firm tries to raise the price other firms
will not do so. So, price rigidity will prevail.
Presence of monopoly element – So long as products are differentiated the firms
enjoy some monopoly power, as each product will have some loyal customers.
Also, when firms collude with each other they can work together to raise the price
and earn some monopoly income.
Advertising – The expenditure is aimed primarily at shifting the demand in
favour of the advertised product.
Price per unit
( Rs. )

P1

P2

D d

Q1 Q’2 Q2 Quantity per

period
Demand curves for an oligopolist
From the diagram show that the action of rivals can be affect the demand
curve faced by oligopoly.
It shows that the price decrease from P1 to P2 will result in movement along
dd and increase sales from Q1 to Q2 as customers take advantages of the
lower price and abandon other suppliers.
However, if the price cut is matched by other firms, the increased in sales
will be less. Since other firms are selling at the same price, any additional
sales must result from increased demand for the product.
The effect of the price reduction is a movement down the relatively less
elastic demand curve, DD. The price reduction from P1 to P2 only increase
sales to Q’2.
So, the responses of competitors can have a significant impact on the
outcomes of managerial in an oligopoly market. Consequently, decision
making in an oligopoly is much more difficult than in other market situation.
 Classification of oligopoly.
Nature of product : Oligopoly classified as pure and differentiated oligopoly. Pure
oligopoly is one in case of which the product produced by competing firms in the market is
identical or homogeneous. Differentiated oligopoly is supposed exits in the market, when
the firms in the market produce and sell the non-homogeneous.

Entry of firms : Oligopoly market classified as ‘open’ and ‘close’ oligopoly. Open
oligopoly when the few are allowed to enter into the market. It’s called open Oligopoly.
Closed oligopoly when the few new firms are not allowed to enter in to the market. It’s
called closed Oligopoly.

Price leadership : Oligopoly can be classified ‘partial’ and ‘full’ oligopoly. Partial
oligopoly when a large firm in the market is recognized as price leader, the other smaller
firms in the market follow the price fixed by the leader firm. Full oligopoly where there is
no leading firm to determine the price of a product in the market. The firm may be engaged
in price competition in the case of full oligopoly.
Agreement or collusion : Oligopoly market can be classified as
‘collusive’ or ‘Non collusive’ on the basis of agreement or collusion among
firms in the market. Collusive oligopoly when different firms in the oligopoly
market have some informal or formal agreement about price, output, division
of market, profit sharing etc.
Non collusive oligopoly when there is no agreement or collusion among the
firms.
DUOPOLY
A duopoly is a situation where two companies together own all, or nearly all, of the
market for a given product or service. A duopoly is the most basic form of oligopoly, a
market dominated by a small number of companies. A duopoly can have the same
impact on the market as a monopoly if the two players collude on prices or output.

 A duopoly is a form of oligopoly, where only two companies dominate the market.
The companies in a duopoly tend to compete against one another, reducing the
chance of monopolistic market power.

Visa and Mastercard are examples of a duopoly that dominates the payments
industry in Europe and the United States.

One disadvantage of duopolies is that consumers have little choice in products.

Another disadvantage of duopolies is that the two players may collude and increase
prices for the consumer.
EXAMPELS.
 COURNOT MODEL OF DUOPOLY.
The distinctive feature of the different oligopoly models is the way they attempt
to capture the interdependence of firms in the market. Perhaps the best known is
the Cournot model, which was developed by a French mathematician in the early
1800s. Although the basic model is rather simplistic, it provides useful insights
into industries with a small number of sellers.
Cournot Duopoly Consider a product for which demand is given by the equation
P = 950 — QT, where QT is the total amount produced by all of the suppliers in
the market. Assume that the marginal and average costs are constant and equal to
$50. "Ihe assumption of constant costs is not critical to the analysis, but it
simplifies the calculations and makes the insights of the model more obvious.
As a starting point, think about the results of having a monopolist in this market. A single
firm would select its output by equating marginal revenue and marginal cost. For the
demand equation given, the corresponding marginal revenue equation is
MR = 950 — 2QT. Thus, the profit-maximizing quantity is the solution to
950 - 2QT = 50
or QT = 450. Substituting this rate of output back into the demand equation gives P = $500.

 Next consider a perfectly competitive market. In this situation, prices are driven to
costs. Hence, the optimal quantity is determined by P = MC, which is the solution to

950 - QT = 50
Or QT = 900. The corresponding price is P = $50. As predicted by economic theory,
price is higher and the rate of output lower for a monopoly supplier than in a perfectly
competitive market.
Now consider a market that has two sellers—a duopoly. In analyzing this case, an
assumption must be made regarding how the two firms respond to one another. The
Cournot model assumes that each firm chooses a rate of output to maximize its profits ,
In the belief that the other firm will continue to produce the same rate of output as it did
in the previous period. Although each firm will, in all probability, change its output
from period to period, the two firms are assumed to remain oblivious to this adjustment.
For the duopoly case, QT in the demand equation P = 950 — QT is the sum of the
output produced by the first firm, qi, and the second firm, q2. Because firm 1 believes
that firm 2 will not change its rate of output, firm 1 will behave like a monopolist in
determining its profit-maximizing quantity. that is, because q2 is assumed constant, the
marginal revenue equation for firm 1 is
MR1 = dtr = d[(950-q1-q2) . q1] = 950-q-2q1
dq1 Dq1
so MR equation for firm 1 is MR1 = 950-q2-2q1,
similarly for firm 2 is MR2 = 950-q1-2q2. In both cases, the profit-
maximizing rate of output is determined by setting marginal revenue equal to
marginal cost. That is,
Firm 1 950 – q2 2q1 = 50
Firm 2 950 – ql- 2q2 = 50,
solving each equation for the output of the firm gives,
• firm 1 q1 = 450-0.5q2………………….(1)

• firm 2 q2 = 450-0.5q1………………….(2)

• Equations (1) & (2) shows the rate of output for each firm based on the
output the managers expect the other firm to produce. For example, if
firm 2 is expected to produce 200 units the profit maximising rate of
output for firm 1 will be 350 units.
Similarly, if firm 1 is expected to produce 200 units, then firm 2 will produce 350 units.
Equation (1) & (2) are referred to as reaction 900
function because they describe how each firm reacts
to the output choice of the other.
This reaction functions are portrayed graphically in Firm 1
the figure. At some point in time , suppose that the
450
firm 1 assumes that firm 2 will produce 200 units,
based on the reaction function, firm 1 produces 300
350 units. If firm 1 produces 350 units , firm 2’s Firm 2
reaction function specifies that it should then produce
275 units.
But an output rate of 275 units from firm 2, 300 450 900
firm 1’s quantity of 350 units is no longer optimal, so it
will alter its output based on its reaction function.
When firm 1 changes then firm 2 needs to make an
adjustment. As long as the output of one firm is different than
that used by the other in selecting its optimal quantity, there
will be adjustment.

 The market will reach an equilibrium when each firm’s

output expectation about the other turns out to be correct.
This can be done by substituting equation (1) & (2) which
gives

q2 = 450 – 0.5(450 – 0.5q2) q2 = 450-225+0.25q2

0.75 q2 = 225 q2 = 300
substituting this value in equation (1) yields q1 = 300.
Thus, when each firm produces 300 units, the market has reached equilibrium.

This result can also be shown graphically. Note that in Figure 10.5, the two
reaction curves intersect at 300 units of output for each firm. This point of
intersection is the graphical equivalent of solving equations (1) and (2)
COURNET MODEL WITH N FIRMS.
 Although the duopoly market structure is the easiest. The
Cournot approach can be used to analyze industries with more
than two firms.

The mathematics will not be developed here, but for an industry with
n firms, the total equilibrium output for a Cournet oligopoly is given
by
n
Qn = Qc ( n+1 ) ..............................(3)
 Where,
n > or equal to 1
Qc is the output resulting from a perfectly competitive market.
 q 2

900 Firm 1

450
Firm 2

300

300 450 900 q 1

FIGURE: REACTION FUNCTIONS FOR COURNOT DUOPOLISTS.

In the previous section, it was determined that QC = 900.
 For the case of a monopoly, n = 1. Thus, equation (3) implies that a monopolist's
output would be 450 units and the combined output of two duopolists (n = 2)
would be 600 units. These are the same values that were calculated in the previous
section. In general, note that as n becomes large, the value of n/(n + 1) approaches
unity.
This means that as the number of firms in the market increases, the combined
output of those firms approaches that of a Perfectly competitive market. But as
output increases because of more firms participating in the market, the demand
equation,
P = 950 - QT,

implies that price must decrease. Thus, the Cournot model suggests that increased
competition, as measured by the number of firms in the market, drives prices down
toward costs.
 Table shows outputs, NO. OF TOTAL PRICE PROFIT
prices, and economic FIRMS OUTPUT (RS.) (RS.)
profits for different
numbers of firms in a 1 450 500 2,02,500
Cournot oligopoly. 2 600 350 1,80,000
Profits were computed
by multiplying output 4 720 230 1,29,600
times (price marginal 8 800 150 80,000
cost). Note that
economic profits decline 16 847 103 44,891
as the number of firms 32 873 77 23,571
increases and that
maximum profit is 64 886 64 12,404
obtained when there is a 128 893 57 6,251
single seller in the
market. 1000 899 51 899
TABLE: Outputs, Prices, and Profits for Cournet
Oligopolists
PRICE RIGIDITY: THE
KINKED DEMAND
MODEL

- POUL
SWEEZY.
The kink in the demand curve stems from an asymmetry in the response of other
firms to one firm's price change. Suppose that the price initially is at Pk, the point
of the kink in the demand curve. Sweezy argued that if one firm raised its price,
other sellers might not follow the increase. The result would be that the firm would
lose a significant amount of sales This is shown in figure as a relatively elastic
demand curve above the existing price, Pk.
In contrast, if the firm reduces its price below Pk, it is likely that the other firms
will follow suit in an attempt to maintain their market shares. As a result, the price
cut by the original firm will not add much to its sales. Figure depicts this outcome
as a relatively inelastic demand curve below Pk.
Associated with the demand curve is a marginal revenue curve. For a linear
demand curve, the absolute value of the slope of the corresponding marginal
revenue is twice as great. Note that the kinked demand curve of figure consists of
two linear curves joined at Pk. Marginal revenue for prices above the kink is given
by MRI. For those below the kink, it is MR2. At the point of the kink, the marginal
revenue curve is a vertical line that connects the two segments.
Price cost
per unit

D Kink demand
MR1

curve
Pk

Mc ’

a a MC
MC’’

b b

D Quantity per

FIGURE: KINKED DEMAND CURVE.

The model assumes that the firm has a U-shaped marginal cost curve, MC, as in Figure
As with previous models, the profit-maximizing output is determined by equating
marginal cost and marginal revenue. output rate is Qk, and the price (6 given by the
demand curve at Qk) is Pk. Note that the profit-maximizing solution occurs at the kink
because it is in the region where marginal revenue and marginal cost intersect.

Now suppose that increases in input prices cause the marginal cost curve to shift
upward to MC’ . Profit maximization requires that marginal revenues again be set
equal to marginal costs . But for the marginal cost curve MC’ , the optimal output is
still Q , and the optimal price is still P. the marginal cost has increased , and no change
in the profit - maximizing price and quantity .

The explanation is the vertical section of the marginal revenue curve found at the kink
in the demand curve . Even though the marginal cost curve shifted upward , it still
intersects marginal revenue in the region where that curve is vertical . Hence , there is
no change in the optimal output rate and price in response to the input price increase.
Similarly , lower input prices allowed the marginal revenue curve to shift
downward , as shown by MC” As long as the new marginal cost curve intersects
the vertical portion of the marginal revenue curve , there will be no change in the
profit - maximizing price and quantity . The firm will continue to produce Qk units
and the price will remain at Pk For price and quantity to change , the marginal cost
curve must shift enough to cause it to intersect the marginal revenue either above
point a or below point b.

The important implication of the kinked demand curve model is that firms in
gopolistic market structures could experience substantial shifts in marginal costs
and still not vary their prices. This theoretical result is consistent with Sweezy's
observation that some oligopolistic markets exhibit very stable prices.
 Criticism for Price Rigidity in Oligopoly.

There are also some other valid explanations for price rigidity, such as nationally
advertised prices, catalogued prices, and fears that recurrent price cuts may trigger
a price war

The model does not explain how the firm arrived at the kink in the first place.
The assumption that price cuts will be matched by the competition but that price
increases will be ignored, may not always be true.
 Reasons For Price Rigidity In Oligopoly

When the firms do not have an understanding between themselves there is a lot of
uncertainty. As a result of which the firms are confronted with an indeterminate
demand curve.
any change in the existing price by a large oligopoly firm may not be economical
for the firm.
when faced with a falling demand for its product, the firm concentrates on a
vigorous sales promotion policy rather than price cut.
Even when firms enter into a collision, the mutually agreed price is kept low in
order to make the entry of new firms unattractive
PRICING UNDER PERFECT
COLLUSION.
When rival oligopolists enter into price competition with each other, they will
drive the market price down to the level of production cost. There is, therefore, a
strong incentive for the oligopolists to collude, raise price and restrict output.

Collusion is just the opposite of competition. It means that the firms co-operates
with each other in taking joint actions to keep their bargaining position stronger
against the consumer.

Perfect collusion primarily consists of cartel arrangements. A cartel is an explicit

agreement among independent firms on subjects like prices, output, market
sharing, etc.
The desire of the firms to have large joint profits give impulse to form
Cartels. But such a desire is short-lived and therefore, the formal
Agreements of cartel cannot be longterm phenomenon.

There are mainly 2 types of Cartel.

(1)Centralized Cartel
(2)Market sharing Cartel
 1.
Model of Centralized Cartel(or Concurrent Prices)

A centralized or perfect cartel is an arrangement where the firms in an industry

reach an agreement which maximises joint profits. So the cartel can act as a
monopolist. Since the firms in the cartel are assumed to produce homogeneous
product, the market demand for the product is the cartel’s demand. It is also
assumed that the cartel management knows the demand at each possible price and
also the marginal costs of all its firms. It can, therefore, find out the MR and MC
for the industry.
For simplicity, it is a assumed that the demand curve (or AR curve) and, therefore,
the MR curve are linear. The MC of the industry is the sum of MC curves of all its
firms, i.e.,

∑MC= MC A + MCB +MCC + …….

The equilibrium in such a situation is depicted in fig.1 where for simplicity only
three firms are assumed.AR is the demand curve and MR the corresponding
marginal revenue curve,. Since the cartel acts as a monopolist, the most profitable
output is where MR=∑MC. So, the optimum level of output is OX which
corresponds to the equlibrium point E. At equilibrium price OP, the cartel supplies
OX of output, with shares of firms A, B and C being OXA , OXB , Oxc respectively.

The output of the cartel is shared between firms on the basis of efficiency of the
firms. If the firm have identical costs, the market is shared equally between them.
If some firms are inefficient they asked to close down temporarily or permanently.

If the number of firms is large or if the industry profits are small, it is difficult to
hold the cartel together for long.
 MC
A MC MC
C
B
∑MC

P
Revenue, Cost (Rs.)

AR=D

MR
Units of output
0
X X X X= X + X + X
A B C A B C

Fig.1. Equilibrium of a Centralised Cartel

 2. Model of market-sharing cartel
In this case the firms in the industry produce homogeneous products and agree upon the
share each firm is going to have. Each firm sells at the same price (due to homogeneity of
products) but sells within a given region. Such a system can function only if the firms
have identical costs.
To simplify, assume that two firms having identical costs agree to share the market half
and half. So the firms sell equal amount of output at equal price. Analysis of such a
situation is done in fig.2, where DD is the demand curve for each firm.

MR is the marginal revenue curve corresponding to the firm’s demand (or average
revenue) curve. The profit maximising output for each firm is Ox. The total output of the
industry equals 2 × Ox , because there are two firms each producing Ox output. The price
charged by the firms is OP and per unit profit earned by each firm is PC .
 MC

d
AC

Revenue, Cost (Rs.) P

D

E d

MR
0 x
Units of output

Fig.2. Equilibrium of a Market Sharing Cartel

 We have assume above that the two firms shares market equally. But
they may have different market shares (says 1/3 rd : 2/3rd ), depending
upon their individual capacities. Even in such a situation The process
of equilibrium remains same.
Market sharing Model has a very respective assumption of identical
Cost for all firms. Since in practice the firms have unequal costs and
every firms wants to have some degree of independent actions, the
market sharing cartels are not long lived.
 CONDITIONS FOR A SUCESSFUL
COLLUSION.

1.Number of firms is small.

2.Secret price cuts by rival oligopolists is easier to detect.
3.Threats of entry potential rivals.
4.Stable demand conditions.
5.Less fear of anti-trust action.
 Cartels And Collusion
In oligopolistic industries, vigorous price competition among firms tends to drive prices down
and to reduce profits. Consequently, in such industries there is a strong incentive for managers
to avoid price competition. One alternative is to collude and set prices at or near the monopoly
level.
Although there may be difficulties in formulating an agreement or in dividing th e profit,
successful collusion can result in substantial benefits for all of the firms involved . Thus, there
is a natural tendency for collusion to occur in such industries. This tendency may take the form
of explicit price-fixing agreements, price leadership, or other practices that reduce competition
between the firms in the market.
The exact nature of the collusion in an industry is determined by the specific characteristics of
the market and by constraints imposed by government policy. Still, a useful model of oligopoly
behavior can be formulated based on the assumption that many managerial decisions are
directed toward avoiding active competition and maintaining pricing Discipline in the industry.
 Collusion and Cheaters
Although successful collusion can improve the profitability of all the firms in an
industry, any one firm can benefit still more by cheating on the agreement. For
example, if the managers in an industry collude and raise prices, an individual firm
will be able to increase its share of the market and its total profit by offering a price
slightly below that charged by other firms.

The benefits of cheating on a collusive agreement are illustrated by figure 10•6'

Consider a firm participating in an oligopolistic market. Assume that the firms in the
market all agree to charge a price Pl. If average and marginal costs are constant and
equal, as illustrated by the figure, economic profit earned by each member Of the
cartel is shown by the rectangle P1 abc.
FIGURE: BENEFITS OF CHEATING ON A COLLUSIVE AGREEMENT
If every firm in the industry reduces its price, the demand curve faced by the
individual firm will be DD, This curve is relatively inelastic because any increase
in sales for the firm associated with lower prices must result from increased
demand for the industry's product.

Now assume that one firm cheats on the collusive agreement and unilaterally
reduces its price to P2. If the price cut is undetected and unmatched, the demand
curve faced by this firm will be dd, and quantity demanded will increase from QI
to Q2. This increase results from sales of the product to new customers and from
sales to customers who previously purchased from other firms.
By selling at a lower price, P2, the firm will lose profits on the QI units that it
was selling at the higher price. But this loss will be more than recouped by profits
on the additional sales, Q2 — QI. The loss is shown in Figure 10.6 as the shaded
rectangle PlaeP2. But the gain is the much larger shaded rectangle, efgb. Hence,
by cheating, the firm is able to earn additional economic profits. A similar
opportunity is available to all the other firms in the industry.

As long as the other firms adhere to the price-fixing agreement, the cheater will
continue to earn additional profit. Eventually, however, other firms will become
aware Of the actions of the cheater and will reduce their prices. When this occurs,
the pricefixing agreement starts to fall apart. Unless there is a mechanism for
restoring price discipline in the industry, the firms may revert to active price
competition.
 PRICE LEADERSHIP.
(A CASE OF IMPERFECT COLLUSION).
Perfect Collusion is often not possible in practice. Mutual distrust among member firms
and unwillingness to surrender all of their sovereignty makes the collusion imperfect.

There are a number of forms of imperfect collusion but most important is price leadership.
According to Burns, “if Changes are usually or always inaugurated by the same firm and
usually or always followed with similar price changes by the other sellers, price
competition may be said to involve price leadership”.

Price leadership is said to exist when the price at which most or all of the firms in the
industry offer to sell is determined by the leader (one of the firms of the industry).
 1.Dominant-firm Price leadership:

This is a typical case of price leadership where there is one large dominant
firm and a number of small firms in the industry.
The dominant firm fixes the price for the entire industry and the small firms
sell as much product as they like and the remaining market is filled by the
dominant firm itself.
It will, therefore, select that price which brings more profits to itself.
 Assumptions.
This is based on the following assumptions;
The oligopolistic industry consists of a large dominant firm and a number of small
firms.
The dominant firm sets the market price.
All other firms act like pure competitors, which act as price takers. Their
demandcurves are perfectly elastic for they sell the product at the dominant firm’s
price.
The dominant firm alone is capable of estimating the market demand curve for the
product.
 For Example:
Where Dm is the market demand curve. Since the leader is assumed to have
complete knowledge of the supply condition of the small firms, Scf is the supply
curve of the small competitive firms as perceived by the leader.
At price P supply of small firms(P1N) equal the market demand. In other words, the
1
dominant firm would sell nothing at P1 Price.
At P Price, P B is supplied by the small firms and BM by the dominant firm.
2 2

If on horizontal line P M we mark a distance P C equal to the share of the dominant
2 2
firm, then we get point C on Dominant firm's demand curve.
In similar way we may mark the share of the dominant firm at each price and can
get a set of points falling on the dominant firm’s demand curve (Ex: Point H at price
P3).
By joining points like P1,C,H,etc.,We get the dominant firm’s demand curve(ARd).

At the price below P4 small firms do not supply at all, as they would not be able to cover
their average variable cost- JDm portion of the market demand is therefore relevant only to
the dominant firm.

Thus, the dominant firm’s demand curve is the line P1ARdJDm and marginal revenue is MRd.

The dominant firm will maximize its profit where its marginal cost = marginal revenue.

In the Example MCd= MRd at point E where Equilibrium price od the dominant firm is P3
and it shows that at P3 price they supply P3G, leaving GL quantity for the dominant firm to
supply.
 S cf = Ʃ MC cf

MC d

N
P
1
C B
P M
2
Revenue ,cost(Rs.)

G H L
P 3

J
P E
D
4
AR m
MR d
d

0 X X X 2

1 Unit of Output

FIGURE: DOMINANT FIRM PRICE LEADERSHIP.

2. THE LOW-COST PRICE LEADER.

This is also known as Price leadership by the Efficient Firm.

Here, Firms with relatively higher costs fear that the competition with the efficient
firm will result in price war which may result in the erosion of their market share,
and may eliminate them in the long run if the price fell lower than the average cost.

In the low-cost price leadership model, an oligopolistic firm having lower costs
than the other firms sets a lower price which the other firms have to follow. Thus
the low-cost firm becomes the price leader.
 For Example:

A and B are two where firm A is more efficient because if the lower cost.
The market demand curve is D.
The firm with the lowest cost will charge PA price, which will be followed by Bthe high - cost-firm
Each of the firm sells Qa quantity, which is together equal to Q.
The profit maximizing price quantity combination for firm B would be PB’ QB. But Firm B will have
to be content with price PA, since If it charges price it would lose customers to the firm A.

Thus, firm A(the leader)sets the price and firm B(the follower)adopts it.
But this price leadership is maintained only if the follower supplies his quota share of output.
 Revenue, cost(Rs.)

SMC
B

SAC
B

P SMC
A
B

SAC
P A
A

E
B

E
A d

Q Q Q

B
*
A
M

Units of outputR

• Thus, share of the market agreements are an integral part of low-cost leadership
 3.BEROMATRIC PRICE LEADERSHIP.
Barometric price leadership gets its name from the fact that one firm acts as a
‘barometer', reflecting changing market condition or cost of production that require
a change in price.
It might be possible that the firm with a large share of the market or a low cost
firm finds difficulties in playing ‘careful’ role in the price manoeuvres. Or
government regulation like MRTP Act,etc.,come in the way of its playing the role
of dominant firm.
In such cases , the leadership role may fall to share of a smaller firm.
The firm has a better knowledge of prevailing market scenario.
This firm may not be the lowest cost firm but it certainly must be an efficient firm.
It is a firm which acts like a barometer in forecasting changes in cost and demand
conditions in the industry and economic conditions in the economy as a whole.
 Advantages Of Price Leadership
One of the most important advantage of price leadership is that by the firms opt out
of the uncertainty surrounding pricing decision in oligopoly.
Oligopolistic firms accept one among them as the barometric leader firm which
possesses better knowledge and predictive power.
As a reaction to the earlier experience of violent price changes and cut-throat
competition among oligopolistic firms, they accept one firm as the price leader.
Price leadership eliminates the possibility of a price war.in absence of price
leadership, the lower cost firm may set a price which is too low. This will not only
start a price war but leaves all firms, including the lower-cost firms than they need to
be.
In case there is no price leader in the oligopoly market, the only alternative to avoid
price war is with the help of product differentiation. On the other hand , price
leadership involve only an understanding between the oligopoly firm.
 CASE STUDY: 1

 RAISING THE PRICE OF UNLEAVENED

BREAD: THE MATZO CONSPIRACY.
 Matzo has been used by Jewish people to commemorate Moses’ leading the children of
Israel. Matzo is flat, unleavened bread eaten at Passover.

The ancient tradition of eating matzo bread at Passover has provided a small .
number of producers with a profitable business.

 The product has religious significance, demand for matzo tends to be rather
insensitive to price and changes in economic conditions.

 For seven decades, three firms dominated the market in United States.

But in May 1991, the executive officers of these firms were indicted by a federal
grand jury for colluding to fix the price of matzo. A few months later, Manischewitz,
the largest of the three firms, was fined $10,00,000 by federal jury and also agreed to
give several lakh dollars more in cash and food to charities to settle several price
fixing cases that were pending.
The suit against Manischewitz alleges that the origin of the collusion was a price
war. When the price cutting spread to matzo, executives of the three leading firms
met together to truce that would stabilize the prices. Then after they began to meet
on regular basis to collude price increases for matzo.
Beginning from 1981, they met for five years to decide to decide how much the
price of matzo would be increased for the following Passover season.

During that period, the price of matzo increased by nearly 38%, while price
index of all other food items increased by 25%.

Although the antitrust action ended price fixing of matzo, it did not result in
lower prices. In 1991, Manischewitz acquired one of the two other firms and now
controls 90% of the U. S. market for matzo.
 CASE STUDY: 2.

 IS BEER BECOMING MORE

CONCENTRATED.
 At first glance the UK brewing industry might appear to be
highly competitive, with many pubs in close proximity to one
another and with many brands of pear and lager offered for sale.

However in reality most pubs are owned by major brewers.

Tied houses account for about 40% of brewers turnover and sell
a limited range of the bears in lagers that are available consumer
choice is clearly constrained.

The oligopolistic nature of the brewing industry can be seen

when we consider the market shares of the leading brewers.
 Market Shares of the largest brewers:
Firm 1985(%) Firm 1996(%)
Bass 22 Bass 38
Allied Lyons (Charlsberg) 13 Scottish Courage 32

Grand Met (Watneys) 12 Whitbread 15

Whitbread 11 Gulnness Brewing 6
Scottish and Newcastle 10 Others 9
Courage 9
Others 23
Total 100 Total 100
3 Firm Concentration Ratio 47 3 Firm Concentration Ratio 85

4 Firm Concentration Ratio 58 4 Firm Concentration Ratio 91

In 1985 the three largest brewers held 47% of the market. By 1996 this has
groom to 85%. What is also significant is that small independent brewers, which
generally operate within a local or regional market, have seen a dramatic fall in
their market share. With this huge growth in the market power of the major
brewers have come large rises in the price of beer.

The monopolies and mergers commission investigated the brewing industry and
recommended that the brewers should be allowed to own a maximum of 2000
pubs each. This would have involved the brewers selling nearly two thirds of
their pubs.

After complaints from the industry government agreed to halve the number sold
but it still hoped that this would increase competition as smaller brewers and
other companies and individuals bought this pubs and then stocked a range of
beers.
The pubs that were sold were the least profitable and many have since
closed, there is now thus less competition between pubs.

 And the Brewers, finding a reduction in there scope for

achieving economies of scale from vertical integration have
sought to gain economies of scale from horizontal integration.

Small independence brewers are understandably reluctant to

expand, faced with the power of massive competition in both
production and retail with heavily advertised brands gaining larger
and larger shares of the market. The small independent find it
impossible to complete in this way.
Thank
you.