4. Oligopoly :
⚫Derived from the Greek word, “oligi’(few) “polein”(to sell).
⚫Marketdominated bya few large firms, i.e.; Competitionamongst
the few.
Competitors
Same-
Different
• Yes
Difficult
5. Introduction
It is a competition between two big sellers each one of them selling
either homogeneous or differentiated products.
Oligopoly
6. Oligopoly
Oligopoly is a market structure in which a small number of firms has the large majority of market share. An oligopoly
is similarto a monopoly, except that rather than one firm , two or more firms dominate the market.
7. The nature of oligopoly
"A market form where there are only a few firms in the industry but there
are many buyers“
• Oligopoly is a particular market which is controlled by a small group of
firms.
• There is a high degree of inter dependence between firms.
• In oligopoly there are at least two firms controlling the market
8. Features of oligopoly
Large number of buyers but only few sellers
Product may be differentiated or standardized
Buyers are small relative to market but sellers are large.
Firms have market power derived from barriers to entry.
Profit maximization conditions.
Ability to set price.
Advertising.
9. MARKETS WITH ONLY A FEW SELLERS
Characteristics of an Oligopoly Market
Few sellers offering similar or identical products
Interdependent firms
Best off cooperating and acting like a monopolist by
producing a small quantity of output and charging a
price above marginal cost
10. Characteristics of Oligopoly:
Only "few" sellers.
Homogeneous/Differentiated
products.
Imperfect knowledge
High barriers to entry.
Mutual dependence.
Non price competition
Characteristics of Oligopoly
11. Barriers to entry:
1. Access to suppliers & distributors
2. Cost of entering a market
3. Legal requirements
4. Legal restriction
5. Fear of retaliation
12. 1.Pure or perfect oligopoly
If the firms produce homogeneous products, then it is called pure or
perfect oligopoly. Though, it is rare to find pure oligopoly situation, yet,
cement, steel, aluminum and chemicals producing industries approach
pure oligopoly.
Types of Oligopoly
13. 2. Imperfect or Differentiated oligopoly
If the firms produce differentiated products, then itis called differentiated
or imperfect oligopoly. For example, passenger cars, cigarettes or soft
drinks. The goods produced by different firms have their own
distinguishing characteristics, yet all of them are close substitutes of each
other
14. 3. Collusive Oligopoly:
If the firms cooperate with each other in determining price or output or
both, it is called collusive oligopoly or cooperative oligopoly. In other
words, the firms in a collusive oligopoly combines to avoid the
competition among themselves regarding the price and output of the
industry. For example , OPEC(Organization for petroleum exporting
countries) serves the example for collusive oligopolies.
15. 4. Non-collusive Oligopoly:
If the firms in an oligopoly market compete with each other, it is called a non-
collusive or non-cooperative oligopoly. The firms in non-collusive oligopoly
tries to gain maximum share of the market by developing policies and
strategies to outperform or beat their rivals
16. 5.Open oligopoly:
An open oligopoly provides full freedom to new firms to enter into
industry. In the situation of open oligopoly there is no restriction of
any kind for the desiring firm to enter into the market.
17. 6.Closed oligopoly:
A closed oligopoly refers to that market structure where only few firms
control the market and new firms are not allowed to enter industry.
Barriers are set to prevent the entry of new firms into the industry. For
example , of large patents , licence, requirement capital , control over
crucial raw materials are some of the reasons which prevent new firms
from entering into industry.
18. Examples of oligopoly:
1. Smart Phone Operating Systems:
The smart phone market is similarly dominated by a handful of
companies, the most powerful two being Google Android and Apple
IOS. Those companies have deep relationships with the handset
providers and are able to have their system pre-installed on each
phone.
19. 86.2
12.9
0.56
1.2
android ios microsoft others0.3
Global market shar held by leading smartphone OS Quarter 2
2016
Android 86.2
IOS 12.9
Microsoft 0.6
Others 0.2
20. 4.Auto industry:
Auto industry is another example of an oligopoly, which is dominated by few
firms and these firm share Hero Motor Corp., TVS and Honda.
✓ HERO: 40% Market Share
Honda: 25% Market Share
✓ TVS: 14% Market Share
22. 5.Oligopoly in soft drink industry:
Two firms control 74 % of soft drink sales:
42.8% coca-cola's 25 brands and 139 varieties.
31.1% Pepsi's 18 brands and 163 varieties.
Coca-Cola and Pepsi are in an oligopoly market.
They mutually and strategically as a decision made by one firm
are interdependent invariably affects the other. They are selling
the homogeneous product so they can control over price.
24. 2.Computer Operating Systems:
New high tech markets can do oligopolies when the companies
become unique products that are supported by an ecosystem
of supporting tech provig.The Computer operating systems are
dominated by Microsoft's Windows, Apple's Mac OS and the
open source Linux operating systems. These three systems
capture close to 100 % of the computer operating system
market due to their established positions. According to the Stat
Owl website.
26. -Operating Systems
Apple, Microsoft
-Gaming Consoles :
Nintendo, Sony, Microsoft
-Canada's wireless service :
Rogers Wireless, Bell Mobility, Tel us
-UK's supermarkets:
Tesco, Sainsbury's, Asda and Morrisons
27. -World wide food processing:
Kraft Foods, PepsiCo and Nestle
-Airliners:
Boeing and Airbus
-American TV :
Disney/ABC, CBS Corporation, NBC Universal, Time Warner,
and News Corporation
-UK's detergent market:
Unilever and Procter & Gamble
28. Some other common examples:
Airlines
Supermarkets
Steel Industry
Health Insurance, etc.........
29. MARKETS WITH ONLY A FEW SELLERS
• Because of the few sellers, the key feature of oligopoly is the tension
between cooperation and self-interest
30. The Equilibrium for an Oligopoly
Nash equilibrium is a situation in which economic
actors interacting with one another each choose
their best strategy given the strategies that all the
others have chosen.
31. The Equilibrium for an Oligopoly
When each firm in an oligopoly chooses its own production to maximize its
own profit, taking the other firms' outputs as given, they collectively product
More than the level produced by a monopoly.
Less than the level produced in perfect competition.
32. The Equilibrium for an Oligopoly
Therefore, the oligopoly price is less than the monopoly price but
greater than the competitive price (which equals marginal cost).
33. How the Size of an Oligopoly Affects the MarketOutcome
Recall from Ch. 15: How an increase in production affects price and profit:
The output effect: Because price is above marginal cost, selling more at the
going price raises profits. (+).
The price effect: Raising production will increase the amount sold, which
will lower the price and the profit per unit on all units sold. (-)
34. How the Size of an Oligopoly Affects the Market Outcome
As the number of firms in the oligopoly increases, the price effect becomes
weaker.
As a result, the output effect determines firms' behavior: firms feel
encouraged to boost production as long as P> MC
35. How the Size of an Oligopoly Affects the Market Outcome
As the number of sellers in an oligopoly grows larger, an oligopolistic
market looks more and more like a competitive market.
The price approaches marginal cost, and the quantity produced
approaches the socially efficient level.
36. • Oligopolists maximize their total profits by forming a cartel and acting
like a monopolist.
• If oligopolists make decisions about production levels individually, the
result is a greater quantity and a lower price than under the monopoly
outcome.
38. Example of Prisoner’s dilemma
Prisoner’s dilemma:
A situation where individual decision-makers always have an incentive to
choose in a way that creates a less than optimal outcome for the
individuals as a group
how is Prisoner’s dilemma works
There are 2 Cigarette company in the city ( red Cigarette/ blue Cigarette)
There are 100 buyers of the city of the cigarette
Both product are identical ,so advertising have huge impact on the sale
41. Why People Sometimes Cooperate:
People cooperate because they want to earn profit or to gain
something beneficial from it. Just like in the case of red cig& black
cig they had cooperated they would have gotten the most profit
without anyone losing anything , they would have earn $100 each
42. Public Policy Toward Oligopolies
▪ Recall one of the Ten Principles from Chapter 1.
“Governments can sometimes improve market outcomes”
▪ In oligopolies, production is too low and price share too high, relative to the
social optimum
▪ Role for policy makers:
Promote competition, prevent cooperation to move the oligopoly outcome
closer to the efficient outcome.
43. How does an oligopoly maximize profits?
▸ oligopolies can successfully thwart competition, they restrict
output to maximize profits, producing only until marginal cost
equals marginal revenue - hence oligopolies exhibit the same
inefficiencies as a monopoly.
44. Artificial barriers
▸ Predatory pricing: Predatory pricing occurs when a firm
deliberately tries to push price slow enough to force rivals out of the
market.
▸ Limit Price : means the current firm sets a low price, and a high
output, so that entrants cannot make a profit at that price. This is best
achieved by selling at a price just below the average total costs (ATC)
of potential entrants. This signals to potential participants that profits
are impossible to make.
45. Natural Barriers
Economies of large scale production. :
▸ If a market has significant economies of scale that have already
been exploited by the present, new entrants are discouraged.
> Ownership or control of a key scarce resource: Owning scarce
resources that other firms would like to use creates a considerable
barrier to entry, such as an airline controlling access to an airport.
46. Summary
• Oligopolists maximize their total profits by forming a cartel and acting like a
monopolist.
• If oligopolists make decisions about production levels individually, the
result is a greater quantity and a lower price than under the monopoly
outcome.
47. Summary
The prisoners' dilemma shows that self-interest can prevent
people from maintaining cooperation, even when cooperation
is in their mutual self-interest.
The logic of the prisoners' dilemma applies in many situations ,
including oligopolies.
48. Summary
• Policymakers use the antitrust laws to prevent oligopolies from engaging
in behavior that reduces competition.
