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 products

Eg: automobiles, TV set, soft

drinks

Collusive

oligopoly

Firms functioning on the basis

of an agreement between them

Eg: 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: SOME

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

Bonnies decision

Clydes decision

Bonnie gets

8 years

Clyde

gets 8 years

Bonnie gets

20 years

Bonnie gets

1 year

Bonnie goes

free

Clyde

goes free

Clyde

gets 1 yearClyde

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.