bahauddin zakariya university,

multan sub campus

sahiwal

MANAGERIAL
ECONOMICS
ASSIGNMENT TITLE :

MARKER STRUCTURE [OLIGOPOLY]

SUBMITTED TO :

MAM NAZIA ASHRAF

MBA 3rd SESSION

SEMESTER [2009-12]

SUBMITTED BY :
GROUP # 05
MBS-09-36 SAJJAD AHMAD
MBS-09-38 UZMA IKRAM
MBS-09-39 ZUBIA KHAN
MBS-09-40 SHAHID ZUBAIR
MBS-09-41 NAJMA ALMAS

[Type the company address]

MANAGERIAL ECONOMICS 2 MARKER STRUCTURE (OLIGOPOLY)

[2010]

WHAT DOES
OLIGOPOLY MEAN
[DEFINITION]
[A situation in which a particular market is controlled
by a small group of firms is called oligopoly.]

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[MBA 3RD SEMESTER]
RD
GROUP # 05 MBA3
[SESSIONSEMESTER
2009-12]
MANAGERIAL ECONOMICS 3 MARKER STRUCTURE (OLIGOPOLY)

WHAT DOES OLIGOPOLY MEAN?

An oligopolistic market is the one which is dominated by some large suppliers. In
an oligopolistic market, the leading firms account for a large percentage of market share.
Firms manufacture branded products and high competition among them results in
tremendous advertising and marketing spends by these firms. Leading forms are able to
make abnormal profits in the long run, as new firms have numerous entry barriers. As all
firms in an oligopolistic market are interdependent, they need to consider impact and
reactions on other firms while determining their own pricing and investment policies.
Homogeneous products, mutual interdependence, few large producers and high entry
barriers in oligopolistic competition.

“A situation in which a particular market is controlled

by a small group of firms is called oligopoly. “

An oligopoly is much like a monopoly, in which only one company exerts control
over most of a market. In an oligopoly, there are at least two firms controlling the market.
For example:

The retail gas market is a good example of an oligopoly because a small number
of firms control a large majority of the market. The car automobile industry is a very
good example of an oligopolistic market. There are various competitors in this market
but the dominant ones include General Motors, Honda, Chrysler, Toyota and Ford. Entry
barriers prevent other entrants and pricing is mostly by competition and mutual
understanding between top manufacturers.

OLIGOPOLY, CHARACTERISTICS:

The three most important characteristics of oligopoly are:

1. An industry dominated by a small number of large firms,

2. Firms sell either identical or differentiated products, and

3. The industry has significant barriers to entry.

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These three characteristics underlie common oligopolistic behavior, including

interdependent actions and decision making, the inclination to keep prices rigid, the
pursuit of nonprice competition rather than price competition, the tendency for
firms to merge, and the incentive to form collusive arrangements.

1. Small Number of Large Firms:

The most important characteristic of oligopoly is an industry dominated by a

small number of large firms, each of which is relatively large compared to the overall
size of the market. This characteristics gives each of the relatively large firms substantial
market control. While each firm does not have as much market control as monopoly. The
total number of firms in an oligopolistic industry is not the key consideration. An
oligopoly firm actually can have a large number of firms, the distinguishing feature is
that a few of the firms are relatively large compared to the overall market. A given
industry with a thousand firms is considered oligopolistic if the top five firms produce
half of the industry's total output.

For example:

The hypothetical Shady Valley soft drink market contains 20 firms, but it is
oligopolistic because the four largest firms account for over 60 percent of total
industry sales and the top eight firms account for almost 80 percent.

2. Homogeneous (Identical) or Differentiate Products:

Some oligopolistic industries produce identical products, like perfect competition in

this regard, while others produce differentiated products, more like monopolistic
competition.

In actuality it points out that oligopolistic industries general come in two varieties.
i. Homogeneous (Identical) Product Oligopoly

ii. Differentiate Product Oligopoly

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MANAGERIAL ECONOMICS 5 MARKER STRUCTURE (OLIGOPOLY)

i. Homogeneous (Identical) Product Oligopoly:

This type of oligopoly tends to process raw materials or produce intermediate

goods that are used as inputs by other industries. For examples are petroleum, steel,
and aluminum.

ii. Differentiate Product Oligopoly:

Goods manufactured in these kinds of markets are for personal consumption.

Consumers need a variety of products, as they have different needs and wants.
Examples include – computers, household products and automobile industry. A few
examples of differentiated oligopolistic industries include automobiles, household
detergents, and computers.

3. Barriers to Enter in The Marker:

Firms in an oligopolistic industry attain and retain market control through barriers
to entry. The most noted entry barriers are:

(1) Exclusive resource ownership,

(2) Patents and copyrights,
(3) Government restrictions, and
(4) High start-up cost.

Barriers to entry are the key characteristic that separates oligopoly from
monopolistic competition on the continuum of market structures. With few if any barriers
to entry, firms can enter monopolistically competitive industries. However, with
substantial entry barriers found in oligopoly, firms cannot enter the industry as easily and
thus existing firms maintain greater market control.

Consider the hypothetical oligopolistic Shady Valley athletic shoe market

dominated by OmniRun, Inc. and The Master Foot Company. Each of these firms has
produced athletic shoes for several years. They have well-known brand names, state-of-
the-art factories that provide economies of scale for large volumes of production, and a
few patents on how their shoes are made.

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Any firm seeking to enter this market is faced with significant barriers.

• First, a new firm must compete with the established Fleet Foot and
OmniFast brand names.

• Second, a new entry has to construct a new factory. With limited initial
sales, this new firm in the market will be unable to take full advantage of
decreasing short-run average cost or long-run economies of scale.

While a new firm could enter this oligopolistic market, such a task is significantly
more difficult than entering an industry with fewer barriers.

K I N K E D D E M A N D C U R V E U N D E R O L I G O P O LY:

An oligopolist faces a downward sloping demand curve but the elasticity may depend on
the reaction of rivals to changes in price and output. Assuming that firms are attempting
to maintain a high level of profits and their market share it may be the case that:

(a) Rivals will not follow a price increase by one firm - therefore demand will be
relatively elastic and a rise in price would lead to a fall in the total revenue of the firm.

(b) Rivals are more likely to match a price fall by one firm to avoid a loss of market
share. If this happens demand will be more inelastic and a fall in price will also lead to a
fall in total revenue.

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MANAGERIAL ECONOMICS 7 MARKER STRUCTURE (OLIGOPOLY)

The kink in the demand curve at price P and output Q means that there is a discontinuity
in the firm's marginal revenue curve.

If we assume that the marginal cost curve in is cutting the MR curve then the firm is
maximising profits at this point.

In the bottom diagram, we see that a rise in marginal costs will not necessarily
lead to higher prices providing that the new MC curve (MC2) cuts the MR curve at the
same output. The kinked demand curve theory suggests that there will be price stickiness
in these markets and that firms will rely more on non-price competition to boost sales,
revenue and profits.

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MANAGERIAL ECONOMICS 8 MARKER STRUCTURE (OLIGOPOLY)

CRITICISM ON KINKED DEMAND CURVE:

Sweezy kinked demand model is criticized, the points at which this theory is
criticized are as follows:

 This model does not explain the price and output decision of the firm

 It does not define the level at which price will be set o order to maximize profits.

 Kinked demand theory does not explain the level of price at which the kink will
occur.

 The kinked demand hypothesizes does not explain the height of the kink.

 This model explains the short-run behaviour of the firm.

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MANAGERIAL ECONOMICS 9 MARKER STRUCTURE (OLIGOPOLY)

ADVANTAGES OF OLIGOPOLY:

There are some advantages of oligopoly, which are as follows:

i. As compared with pure competition or pure monopoly, differentiated oligopoly

places at the consumer’s disposal a wider range of commodities. To this extent, it
promotes consumer’s welfare.

ii. Firms are able to reap economies of scale, due to large scale competition.
-Products cannot be produced by individual firms on a small scale.

iii. There is an incentive to engage in Research & Development.

-They have the ability to earn super normal profits and capture larger market
share

iv. Firms enjoy lower costs due to technological improvement.

-This results in higher profits which will improve firm's capacity to withstand
price war.

DISADVANTAGES OF OLIGOPOLY:

There are some disadvantages of oligopoly, which are as follows:

i. small output and high prices

ii. Lower efficiency

i. small output and high prices:

As compared with perfect competition, oligopoly results in the restriction

of output and charging of higher prices.

ii. Lower quality product:

In the oligopoly there are chances of low quality of the products because
there is little bit monopoly system because in the oligopoly there is corporation

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MANAGERIAL ECONOMICS 10 MARKER STRUCTURE (OLIGOPOLY)

between some organizations so they can set their price by their own and can
decrease the quality of the product.

Oligopolies in a market have problem that the firm have extensive amounts of
power and may even collude to set prices, which is illegal. For the consumer this means
high prices accompanied by the possibility of a low quality product. It could be argued
that it ends up being a less competitive market.

CONCLUSION:

Oligopoly shows poor performance from all angles. For the participants ot is an
awkward organization, because they can neither avail of individual opportunities as in
perfect competition nor building up un efficient money-making organizations as in
monopoly. It is also unresponsive to market changes because

a. They are not interested in short-run condition.

b. They are anxious not to spoil their mutual relations for a temporary
advantage.

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MANAGERIAL ECONOMICS 11 MARKER STRUCTURE (OLIGOPOLY)

PRACTICAL EXAMPLES:

There are some examples of organizations that are working as oligopolistic

market.

1. CANADA based organizations:

Three companies (Rogers Wireless, Bell Mobility and Telus) share over 94%
of Canada's wireless market.

 Rogers Wireless operates:

Rogers Wireless operates in a big neighborhood. Canada's

leading mobile carrier ahead of such rivals as Bell Mobility and TELUS, the
company provides wireless voice, messaging, and Internet services to about 8
million customers over its network. Rogers Wireless is the only Canadian
carrier with a cellular network based on the GSM (global standard for mobile
communications) platform. It also derives some revenue from sales of prepaid
voice service, as well as mobile devices from such vendors as Nokia and LG.
The company operates throughout Canada and has offices in Calgary, Halifax,
Montreal, Toronto, Vancouver, and Winnipeg. Rogers Wireless is a
subsidiary of Rogers Communications.

Sales of Rogers Wireless operates the current year is $0.1M

 Bell Mobility:

First in Canada with a cellular network, Bell Mobility is in a nip-

and-tuck struggle for the top wireless carrier spot. The company provides
mobile voice, data, and broadband Internet services to about 6 million
customers, primarily in eastern Canada, under the Bell Mobility and Solo
Mobile brands. It also markets services in other regions under the Virgin
brand through subsidiary Virgin Mobile Canada which operates in partnership
with Virgin Group. The company's products and services are made available
through a network of dealers and retail outlets, including its own TotalCom

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stores. Bell Mobility accounts for about one-quarter of sales for its parent
company BCE, Canada's largest telecommunications company.

Sales of Bell Mobility for the current year is $634.4M

 TELUS:

TELUS banks on the fact that its customers have something to

say. One of Canada's top telecom service providers, the company is the
incumbent local-exchange carrier in British Columbia, Alberta, and eastern
Quebec. TELUS provides wireline voice services to more than 4.2 million
customers and Internet access to about 1.2 million. The company's wireless
unit serves about 6.2 million mobile phone customers nationwide with voice,
data, and mobile Internet services. Through its TELUS TV unit, it offers high-
definition TV, video-on-demand and pay-per-view television, and personal
video recorder (PVR) services. TELUS also provides businesses with
consulting, network management, and other IT services.

Sales: $9,153.6M
One year growth: 16.0%
Net income: $951.0M
Income growth: 3.1%

2. UNITED KINGDOM (UK) based organizations:

Four companies (Tesco, Sainsbury's, Asda and Morrisons) share 74.4%
of the grocery market.

The detergent market is dominated by two players, Unilever and Procter

& Gamble.

 UNILIVER

Either of two linked companies, Unilever PLC (based in London)

and Unilever NV (based in Rotterdam). They are the holding companies for
more than 500 firms worldwide that manufacture and sell soaps, foods, and
other products. The modern Unilever was established in 1929 as an

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association between the British manufacturer Lever Bros. and several other
European soap and margarine manufacturers. Today most Unilever sales are
in household products, including soaps and detergents, margarines, cooking
fats, dairy products, toiletries, and packaged and processed foods. The group
also produces paper and plastic products, industrial chemicals, and animal
feeds.

Sales: $57,117.2M
One year growth: (3.4%)
Net income: $7,449.2M
Income growth: 22.4%

 The Procter & Gamble:

Company (P&G) boasts boatloads of brands. The world's top

maker of household products courts market share and billion-dollar names.
It's divided into three global units: household care, beauty and grooming, and
health and well-being. The company also makes pet food and water filters and
produces a soap opera. Some two-dozen of P&G's brands are billion-dollar
sellers, including Fusion, Always/Whisper, Braun, Bounty, Charmin, Crest,
Downy/Lenor, Gillette, Iams, Olay, Pampers, Pantene, Pringles, Tide, and
Wella, among others. P&G shed its coffee brands in 2008. Being the
acquisitive type, with Clairol and Wella as notable conquests, P&G's biggest
buy in company history was Gillette in 2005.

Sales: $78,938.0M
One year growth: (0.1%)
Net income: $12,736.0M
Income growth: (5.2%)

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BIBLIOGRAPHY:
http://www.investopedia.com/terms/o/oligopoly.asp

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly,+characteristics

http://www.buzzle.com/articles/oligopoly-characteristics.html

http://www.blurtit.com/q2774865.htm

http://www.blurtit.com/q435484.html

http://tutor2u.net/economics/content/topics/monopoly/kinked_deman
d.htm

K.K. DEWET, MODERN ECONOMIC THEORY, DIAMOND JUBLEE

EDITION, YEAR OF PUBLISH 2005

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