Imperfect

Competition; Few
Sellers
Oligopoly
Oligopoly Market
• An imperfectly competitive market structure in
which a few large firms dominate the market
• How to define an oligopoly?
▫ Few sellers
▫ Either a homogenous or a differentiated
product
▫ Difficult market entry
Few Sellers
• Again, there is no specific number that must
dominate an industry before it is an oligopoly.
• The components of an oligopoly are the mutual
interdependence .
▫ Def: Mutual interdependence in which an action
by one firm may cause a reaction from other firms.
• Being there are only a few firms in the market, it
is easy to collude in the market
Homogenous or Differentiated
Product
• The goods produced may be identical or may not
be identical.
Difficult Entry
• Some barriers:
▫ Exclusive financial requirements
▫ Control over an essential resource
▫ Patent rights
▫ Other legal barriers
▫ Economies of Scale- this is the major
one
Price and Output for an Oligopolist
• The maximize price is not as simple at MR=MC.
One player’s move depends on the anticipated
reactions of the opposing player.
• In oligopoly market we have different models
to find out output and price equilibrium point.

▫ Price Collusion -----The Cartel

▫ Price Leadership
Price Collusion
• An agreement among firms in the industry to
divide the market and fix the prices
• When firms in an oligopoly actively cooperate
with each other, they engage in collusion.
This term denotes a situation in which two or
more firms jointly set their prices or outputs,
divide the market among themselves, or make
other business decisions jointly .
The best example for price collusion is Cartel .
A cartel is an organization of independent firms,
producing similar products, that work together to
raise prices and restrict output.
When oligopolists collude to maximize their
joint profits, taking into account their mutual
interdependence, they will produce the monopoly
output and price and earn the monopoly profit.
Price Leadership
• They play a game of follow the leader.
▫ Def: Price leadership is a pricing strategy in which
a dominant firm sets the price for an industry and
the other firms follow its price by less or more
proportion.
Price Discrimination
Price discrimination occurs when the same
product is sold to different consumers for different
prices.
Examples of forms of price discrimination include
coupons, age discounts, occupational discounts
Price Discrimination
You are a profit-maximizing monopoly seller of
computer software with zero marginal cost.
Your market contains established customers in (a)
and new customers in (b).
Old customers have more inelastic demand
because of the high costs of switching to other
programs. If you must set a single price, you will
maximize profits at a price of $20 and earn profits
of $1200. But suppose you can segment your
market between locked-in current users and
reluctant new buyers. This would increase your
profits to ($30 x 30) + ($15 x 30) $1350.
Types of Price Discrimination
1st-degree price discrimination – charging
the maximum price to each consumer--- willing to
pay.
2nd-degree price discrimination – charging
different prices depending on the quantity or
choices of the consumer. Or to the block of service
(like electricity bill)
3rd-degree price discrimination – charging
different prices depending on a particular market
segment, e.g. age profile, income group, time of
use.