Amity Business School

Models Of Oligopoly

Presented To : Presented By:

Prof. S K Laroiya Deboleena Kunar C- 15
Kirti Mahansaria C – 19
Varun Gupta C- 41
Mayank Badkul C- 47
Sahil Gupta C-48
 Amity Business School

Table of Contents
1. Introduction On Market
2. Oligopoly
3. Causes For Existence Of Oligopolies
4. Models Of Oligopoly:- 1.
Kinked Model
2. Collusion
3.The Cartel Model
4. Price Leadership
5. Cournet and Bertrand model
6. Nash equilibrium
5. Drawbacks Of determining price output relationship
6. OPEC: Most Successful Cartel
 Introduction Amity Business School

What is a market?
In the words of Cournet, a French economist “economics understand by
the term market not any particular place in which things are bought and
sold but the whole of any region in which buyers and sellers are in such
free intercourse with on another that the price of same goods tends to
equality easily and quick

Types of Market

Monopolistic

Perfect
competition Monopoly

Oligopoly
 Amity Business School

Oligopoly??
An oligopoly is a market form in which a market or industry is
dominated by a small number of sellers (oligopolists). The word
is derived, by analogy with "monopoly", from the Greek ὀλίγοι
(oligoi) "few" + πωλειν (polein) "to sell“. Hence oligopoly refers
to as "competition among the few”

Oligopoly
Pure oligopoly Differentiated oligopoly
 Amity Business School

Characteristics of oligopoly
Interdependence

Advertizing and selling cost

Group behavior

Restricted entry

Perfect knowledge
 Amity Business School

Causes for existence of

oligopoly
Economies of scale

Economies Of Scope

Barriers to entry

Product Differentiation

Firm created causes of

oligopoly
 Kinked Amity Business School

Kink:- A sharp bend in a line produced when a line having a loop

is pulled tight.
It is formed at the prevailing price level because the segment
of the demand curve above it is highly elastic as compared to the
part below it.
 Amity Business School

prevailing price

Price ●
●

●
●
The competitors will reduce out of fear
Due to this the increase in sales will be of
reduction less duration

●
● Substantial reduce in sales.

Price increase Customers will go to competitors.

●
●

●
● Only those customers will stay back who are attached
to the product .
Factors affecting Amity Business School

kinked Oligopoly

Decline in cost

Rise in cost

Decrease in demand

Increase in demand
 Collusion Amity Business School

Acting together in secret toward an illegal end

types

The price & output policy is

Cartels
jointly decided

Price leadership One firm sets the price and

others follow
 Cartel Amity Business School

All types of formal and tactics agreements

Central Administrative authority
Secure maximum joint profits
Profits distribution and output quota are decided unanimously

How cartel works??

 Types of cartels Amity Business School

Market sharing Price sharing Output Quota Instable cartel

Profit as well as The price is the Agreement of

the output is only constraint, The low cost
quota of
determined by not the output firms tend to
output on the
central authority reduce the
They can have basis of
cost of
different agreed upon
products
Very rare advertising policy. price.
even in illegal
world. In case of conflicts, In case of
cost bargain may homogeneous The new
occur.
products the entrants tend
They have to cost is same to disturb the
be tight not They are otherwise it’s price balance
loose. unstable not.
 Amity Business School

Price leadership
Established as a result of informal and tacit understanding
between the oligopolists.
Price leadership by a low cost firm
Low cost firm sets a lower price than the profit maximizing
price of high cost firms
Since the high cost firms will not be able to sell the
product at the higher price ,they are forced to agree to the
low price set by the low cost firm.
Of course low price leader has to ensure that the price
which he sets must yield some profits to the high cost firm –
their followers
 Amity Business School

Price output determination under low

cost price leadership
In order to simply our analysis we make following assumptions
 There are two firms A and B . The firm A has lower cost of
production than B.
 The product produced by the two firms is homogenous so
that consumers have no preference between them.
 Each of the two firms has equal share in the market. In other
words demand curve facing each other will be half of total
market demand curve of the product.
 Amity Business School

Price output determination

 Amity Business School

Price leadership by dominant firm

Under this one of the few firm may be producing a very
large proportion of total production of the industry and
therefore dominate the market.

Other firms are small and incapable of making any

impact on the market.

Dominant firm fix estimates own demand curve and fixes

a price which maximizes its own profit.
 Amity Business School

Barometric price leadership

Under this model an old ,experienced, largest or most
respected firm assumes the role of a custodian who
protects the interest of all.

He sets the price with regard to demand for product,

cost of production ,completion for from related products
and sets a price which is best from viewpoint of industry.

All firms follow willingly

 Amity Business School

Cournet and Bertrand model

In these model oligopolistic firms ignore
interdependence.
In Cournet model oligopolistic firm would set its output in
the belief that’s its rival firm output would remain constant.
Bertrand model assumed that its rivals will keep their
price constant.

Example. Market has demand

P = 30 − Q,
with two firms, so
Q = Q1 + Q2,
assume that there is no fixed cost and marginal cost,
 Amity Business School

MC1 = MC2 =0.

Firm 1 would like to maximize its profit
P × Q1
d
(( 30  Q 1  Q 2 ) * Q 1 )  0
dQ 1
Q 2
Q 1  15 - ;
2
Q 1
Q 2  15 
2
Solving 2 equations we get
Q1=10
Q2=10
 Game theory Amity Business School

Game theory is a branch of applied mathematics that is used in

the social sciences, most notably in economics.
Attempts to Mathematically capture the behavior in strategic
situations, in which an individual's success in making choices
depends on the choices of others.
Traditionally it was used to find equilibrium in the above
situations where each player adopts a strategy that does not
change .
Nash Equilibrium being the most famous.
The field of game theory came into being with Émile Borel's
researches in his 1938 book Applications aux Jeux des Hazard,
and was followed by the 1944 book Theory of Games and
Economic Behaviour by John von Neumann and Oskar
Morgenstern.
 Types Amity Business School

Extensive form Game

Here the order of operations is very important.
 Player 1 moves first and chooses either F or U. Player
2 sees Player 1's move and then chooses A or R. Suppose
1 chooses U and then Player 2 chooses A, then Player 1 gets 8
and Player 2 gets 2.
Normal Form Game
•The players can act simultaneously.
•The players do not know about other person’s strategy.
Characteristic function form
•In this form co-operation amongst the players is present.
Partition function form
•All the possibilities of coalition are ignored.
 Amity Business School
Co-operative and non co-operative games
•Firms can arrive at an enforceable or binding contract
that permit them to adopt a strategy to maximize joint
profits.
•Due to conflicts in the interests two firms cannot sign a
binding contract.
Infinite long games
•Are generally finished in finitely many moves.
•The focus of attention is usually not so much on what is
the best way to play such a game, but simply on whether
one or the other player has a winning strategy.
Perfect information and imperfect information
games
•A game is one perfect information if all players know the
moves previously made by all other players
 Amity Business School

Nash Equilibrium
Nash equilibrium , named after John Forbes Nash, is
a solution concept of a game.

Describes a set of strategies where each player

believes that he is doing his best, given the strategy of
the other person or player.

Since each is doing the best, given other’s strategy and

no one has a tendency to change it unilaterally, there
exists Nash equilibrium
 Amity Business School

The Prisoner’s Dilemma

It was originally framed by Merrill Flood and Melvin
Dresher working at RAND in 1950. Albert W.
Tucker formalized the game with prison sentence payoffs
and gave it the "prisoner's dilemma" name (Poundstone,
1992).
It explains how rivals behaving selfishly act contrary to
their mutual or common interests.
Without enforceable agreements, members of
a cartel are also involved in a (multi-player) prisoners'
dilemma
 Amity Business School

Drawbacks in determining
price output relation
Ignoring
interdependency

Predicting reaction
patters

Cooperative behavior
 Amity Business School

OPEC
Organization of petroleum Exporting countries (OPEC)
was formed in 1960.
Initially it contained only 5 members, the membership of
cartel however expanded to 13 by 1973.
The situation underwent a dramatic change in 1973 with
the Arab-Israel war.
The estimated price of a barrel of oil on the world market
was $2.91 in 1973 but jumped to $10.77 in 1974.
Another jolt was inflicted in 1978 when revolution took
place in Iran. Iranian exports at that time accunted for 20
percent of all OPEC ex-ports, fell almost to zero.
 Amity Business School

Reasons for success of OPEC

 Price inelasticity of demand for oil

 Substantial market power
 Few members
 Policies of oil importing nations
 Amity Business School

$ per barrel
Oil prices Actual price
Cost in 1973 prices
35
Iraq invades Impending
Iran OPEC’s first war
30 quotas with Iraq

Iraq invades
Revolution Kuwait
25 World-wide
in Iran recovery

20 First oil from

North Sea
World-wide
15 slowdown
Cease-fire in New OPEC
10 Iran-Iraq war quotas Recession
in Far East
Yom Kippur
5 War: Arab oil
embargo

0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
 Amity Business School

References
 http://en.wikipedia.org/wiki/Oligopoy
 Managerial Economics : G S Gupta
 Managerial Economics: H L Ahuja
 http://www.apsva.us/15722093173654360/lib/157220
93173654360/theoryofOligopoly
 http://www.google.co.in/search?
hl=en&q=kinked+oligopoly&sourceid=navclient-
ff&rlz=1B3MOZA_enIN397IN397&ie=UTF-8 
 Amity Business School

Thank you!!