Oligopoly

Oligopoly Market Characteristics Few sellers. Homogenous or unique products. Blockaded entry and exit. Imperfect dissemination of information. Opportunity equilibrium. for above-normal economic! profits in long-run

Examples of Oligopoly "arbonated Beverage #arket $epsico % "oca "ola!& 'omestic aviation Industry in India Few $layers like Indian (irlines& )et airways& *ingfis+er!.

In t+is form of market structure& t+e number of sellers is few suc+ t+at a seller can closely watc+ w+at +is co-selller is doing in terms of +is price % output and take t+at into consideration w+ile doing +is own profit maximi,ation exercise. For instance- .et $ / a 0 b1 be t+e market demand curve w+ere t+e market is supplied by two sellers 2 % 3. 4+en market demand can be expressed as $ / a 0 b 12513!. 6ow firm7seller 2 will define +is profit function as 8 / 49 04" / $12 0 "2 / :a 0 b 12513!;12 0 "2 . 4+us now wit+ oligopoly& a seller<s profit function includes rival<s output 13 as given& w+ic+ was not t+e case in ot+er forms of market. =imilarly it can also include $3 if sellers are competing based on $rices and not on market s+are

4+is value of rival<s output 13! is arrived at by a seller by looking at +ow rival was selling in last period. He looks at t+e quantity or price +is rival was selling or c+arging in last period and assumes guesses or con>ectures! t+at t+e rival will continue to do t+e same

in t+is period and based on t+is guess about 13 or $3& +e incorporates t+ese 13 or $3 in +is profit function and maximi,es +is profit and determines +is equilibrium quantity 12! to be sold and price $2! to be c+arged.

4+e seller does not& +owever& talk to +is rival to understand exactly w+at would be 13 or $3 . 4+is is t+e case of non-collusive oligopoly.

4+ere are several models of non-collusive oligopoly depending on different types of con>ectures7guesses t+at a seller makes about +is rival

Non-Collusive Oligopoly Models "ournot 'uopoly #odel 0 w+en a seller makes a guess about +is rivals output be+avior ?x- "oke and $epsi Bertrand<s 'uopoly #odel - w+en a seller makes a guess about +is rivals price be+avior ?x- 4imes of India and Hindustan 4imes =tackelberg<s 'uopoly #odel 0 w+en a seller is a market leader in t+e sense +e knows t+e demand and cost conditions of t+e market and also knows t+at +is rival will watc+ +is be+avior and take it into +is decision making. 4+is normally +appens w+en a seller is a first-mover in t+e industry. ?x- =ony in gaming industry. =wee,y<s *inked demand curve #odel- guess of a seller is if +e raises price no co-seller will follow +im but if +e lowers price all co-sellers will follow Limitation of Non-collusive Oligopoly

6on-collusive form of oligopoly gives rise to a lot of uncertainty. Because entire profit maximi,ation exercise of a seller is based on guess about rival<s be+avior. If rival<s be+avior does follow w+at +e guessed t+en +is profit max exercise fails to give t+e maximum profit. 4o avoid suc+ uncertainty sellers in oligopoly market often move towards "ollusive oligopoly by secretly colluding wit+ co-sellers Collusive Oligopoly

"artels 0 market s+aring& >oint profit maximi,ation may be t+e ob>ective of t+e cartel #ergers 0 become one seller $rice .eaders+ip 0 eit+er t+e dominant firm or t+e low cost firm will set t+e price& ot+ers will follow it. @@@@@@@