CHAPTER 11

OLIGIPOLY
DEFINITION
• Oligopoly is a type of imperfectly competitive market in which there
are only a few sellers, each supplying a product that is similar or
identical to the others.
CHARACTERISTIC OLIGOPOLY
1) Limited number of firms: It is assumed that this market has only a few firms.
2) Homogeneous or differentiated product: Only a few businesses are allowed
to market homogeneous or differentiated products (or services).
3) Strategic behaviour: While companies aren't usually classified as "price
takers" or "price setters," their strategic behaviour in dealing with competition
or rivalry will advise them on pricing and quantity setting issues.
As a result, having access to information is critical for making strategic
decisions.
4) Obstacle: There are natural and legal obstacles, but not nearly as many as a
monopolistic market structure.
EQUILIBRIUM AND PROFIT MAXIMIZATION
QUANTITY PRICE TOTAL
(LITTLE) REVENUE
0 120 0
10 110 1100
20 100 2000
30 90 2700
40 80 3200
50 70 3500
60 60 3600
70 50 3500
80 40 3200
90 30 2700
100 20 2000
110 10 1100
120 0 0
Supplying Price and Quantity
• In a completely competitive market, the price of water would be driven to the point
where the marginal cost is zero:
• Q = 120 litres P = MC = RM0
In a monopolistic market, the price and quantity would be where total profit is maximised:
Q = 60 litres P = RM60

• Provided Price and Quantity

A monopolist would produce just 60 litres of water, despite the fact that the socially
efficient quantity of water is 120 litres.
So, what are the chances of oligopoly succeeding?
The Kinked Demand curve model
Assumption:
1. If an oligopolist reduce its price, its rivals will follow and
cut their price to prevent losing customers.
2. If an oligopolist increase it price, its rivals do not increase the
price and keep their price same, thereby they gain customers from
the firm that increase the price.
• In Figure, oligopolistic firms face a demand curve that slopes downward. The reaction of
competitors to changes in price and output determines the elasticity of the demand curve.
• Firms are aiming to keep their profit margins as high as possible. If the equilibrium price is
P* and one firm (Firm A) raises its price above P*, competitors will not follow suit.
• Because demand is relatively elastic when the price is higher than P*, this resulted in a
significant decrease in the amount required by Firm A. As a result, a rise in price would
result in a decrease in overall income for Firm A. However, if one firm (e.g., Firm B) lowers
its price below P*, competitors are likely to follow suit in order to avoid losing market share.
• As a result, because demand is inelastic at prices below P*, the firm does not obtain as
much quantity required. As a result, the companies perceive a kink in demand at Pinitial *'s
price, and the related marginal revenue (MR) curve is discontinuous (there is a gap).
COMPETITION, MONOPOLIES, AND
CARTELS
It's possible that the oligopoly will agree on a monopolistic outcome.
1. Collusion
• A market agreement among enterprises on how much to produce or
how much to charge.
2. A cartel is a group of businesses that work together to achieve a
common goal.
• Although oligopolists wish to form cartels and profit from monopoly
profits, this is not always achievable. As a matter of public policy,
antitrust laws ban explicit agreements among oligopolists.
The Equilibrium for an Oligopoly
• When economic actors engage with one another, they each pick their
best strategy depending on the tactics adopted by the others. This is
known as a Nash equilibrium. When oligopolistic enterprises strive to
maximise profit, they produce a quantity of output that is larger than
a monopoly but lower than that of competition.
• The price of an oligopoly is greater than the price of a monopoly but
lower than the price of a competitive market (which equals marginal
cost).
SUMMARY
• Oligopolists maximise their overall profits by establishing a cartel and
operating as a monopoly; but, if oligopolists make individual
production level decisions, the outcome is a higher quantity and
lower price than if they operate as a monopoly.