GROUP 3 : OLIGOPOLY

STRATEGIC MANAGEMENT GSM 5160

The Term “Oligopoly” has been derived from two Greek words.

‘Oligi’ which means few and

‘Polien’ means sellers.

OLIGOPOLY

A market structure in which a few large firms dominate a market

Pure oligopolySelling homogenous products Eg: aluminums, sugar

Differentiated oligopoly

Selling differentiated productsEg: automobiles, TV set, soft drinks

Collusive oligopoly

Firms functioning on the basis of an agreement between themEg: Oil and Petroleum Exporting Countries (OPEC)

Non - collusive Oligopoly

no any kind of agreements and conducts between the firms Eg: Automobile industry

TYPES

SOURCES

Factors that give rise to oligopoly are : Huge capital investment Economies of scale. Patent rights Control over certain raw materials Merger and takeover.

CHARACTERISTICS

NUMBER OF FIRMS: FEW

VARIETY OF GOODS: SOME

BARRIERS TO ENTRY: HIGH

CONTROL OVER PRICES: SOMESome contro

l

Small number of firms offering similar product or service

Sensitive to changes and actions by firms. For example, a move on changing price or introducing new models, will evoke a countermove from its rival.

Rivals will match any price cuts and not follow their price rise. Firms view their demands as inelastic for price cuts, and elastic for price rise.

If one firm changes the price, demand for its product depend on the reaction of its rival for the change in price.

DEMAND

KINKED DEMAND CURVES

PRICE Price war- a series of competitive price cuts that

lowers the market price below the cost of production

Price fixing- an agreement among firms to charge one price for the same good

Collusion/cartel- an agreement among firms to divide the market, set prices, or limit production

WHAT IS COLLUSION?

• Called cartel

– Illegal in US & Europe

• Factors affecting successful collusion:

– Number & size distribution of sellers

– Product Heterogeneity

– Cost Structure

– Size & Frequency of Orders

– Threat of retaliation

Game Theory ?

Game theory helps us understand oligopoly and other situations where “players” interact and behave strategically.

Dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Prisoners’ dilemma: a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial

PRISONERS’ DILEMMA

The police have caught Bonnie and Clyde, two suspected bank robbers, but only have enough evidence to imprison each for 1 year.

The police question each in separate rooms, offer each the following deal: If you confess and implicate your partner,

you go free. If you do not confess but your partner

implicates you, you get 20 years in prison. If you both confess, each gets 8 years in

prison.

Confess Remain silent

Confess

Remain silent

Bonnie’s decision

Clyde’s decision

Bonnie gets

8 yearsClyde gets 8 years

Bonnie gets

20 years

Bonnie gets

1 year

Bonnie goes free

Clyde goes free

Clyde gets 1 year

Clyde gets 20 years

Confessing is the dominant strategy for both players.

Nash equilibrium: both confess

• Outcome: Bonnie and Clyde both confess, each gets 8 years in prison.

• Both would have been better off if both remained silent.

• But even if Bonnie and Clyde had agreed before being caught to remain silent, the logic of self-interest takes over and leads them to confess.

CONCLUSION

Oligopolies can end up looking like monopolies or like competitive markets, depending on the number of firms and how cooperative they are.

The prisoners’ dilemma shows how difficult it is for firms to maintain cooperation, even when doing so is in their best interest.

Policymakers use the antitrust laws to regulate oligopolists’ behavior. The proper scope of these laws is the subject of ongoing controversy.