The Term “Oligopoly” has been derived

from two Greek words.

‘Oligi’ which means few and ‘Polien’ means
sellers.

Thus Oligopoly is an abridged version of

monopolistic competition . It is a
competition among few big sellers each
one of them selling either homogenous or
hydrogenous products.
Feller defines Oligopoly as
“Competition among the
few”.

In an Oligopolistic market the

firms may be producing
either homogenous products
or may be having
differentiation in a given line
of production.
Oligopoly refers to a market situation where there r a few
sellers (2 to 10) in a market, selling homogenous or
differentiated products. Oligopoly is often described as
‘Competition among few’.

When the products of a few sellers are homogenous it is

known as ‘Pure Oligopoly’ When the products of few
sellers are differentiated , but close substitutes of each
other it is known as “Differentiated Oligopoly” .
1. Few Sellers : An oligopoly market is
characterized by a few sellers and their number
is limited . (usually not more than 10) Oligopoly
is a special type of imperfect market. It has a
large number of buyers but a few sellers.

2. Homogeneous or Differentiated Product :

The Oligopolists produce either homogenous or
differentiated products. Products may be
differentiated by way of design , trademark or
service
3. Interdependence : The most important
feature of the Oligopoly is the
interdependence in decision making of the
few firms which comprise the industry.

The reactions of the rival firms may be

difficult to guess. Hence price is
indeterminate under Oligopoly.

4. High Cross Elasticities : The cross

elasticity of demand for the products of
oligopoly firms is very high. Hence there is
always the fear of retaliation by rivals.
Each firm is conscious about the possible
action and reaction of competitors while
making any change in price or output
5. Importance of Advertising and Selling costs
: A direct effect of interdependence of the Oligopolistic
firms is that they have to employ various aggressive and
defensive marketing weapons to gain greater share in
the market or to maintain their share.
Hence, the firms will have to incur a good deal of costs on
advertising and other measures or sales promotion .
Firms in Oligopoly market avoid price cutting and try to
compete on non-price basis. This is because if they start
under-cutting one another, a type of price war will
emerge which will drive a few of them out of the market
as the customers will try to buy from the seller who is
selling at the cheapest price.
6. Competition : Competition is unique in an
oligopoly market. It is a constant struggle
against rivals.

7. Different size : The size of firm in an

oligopoly market. It is a constant struggle
against rivals.

8. Group Behaviour : Each Oligopolist

closely watches the business behaviour of
other Oligopolists in the industry and
designs his moves on the basis of some
assumptions of their behaviour .
9. Uncertainty : The interdependence of
other firms for one’s own decision
creates an atmosphere of uncertainty
about price and output

10. Price Rigidity : In an oligopoly

market each firm sticks to its own price
to avoid a possible price war. The price
remains rigid because of constant fear
of retaliation from rivals.
11. Indeterminate or Kinked Demand Curve : The
interdependence of firms and the inability of a
particular firm to predict the behavior of other firms
make the demand curve of an Oligopolistic firm
indefinite and indeterminate.
The demand curve of an oligopolist loses its
definiteness and determinates and goes on constantly
shifting as the rivals change their prices in responds
to the prices change made by the firm . According to
Paul Sweezy, firms in an oligopoly market have a
kinky demand curve for their products.
Because of interdependence , an oligopolistic firm cannot
assume that its rival firms will keep their quantities
constant when it makes changes in price or quantity. When
an oligopolistic firm changes its prices, its rival firms
would retaliate and change their prices which in turn would
affect the demand of the former firm.

Oligopoly can be classified into several forms. Some of the

important forms of Oligopoly are as follows
1. Perfect and Imperfect
Oligopolies : If the product of the
rival firm are homogenous then it is
Perfect Oligopoly, if the product are
differentiated it is Imperfect Oligopoly.

2. Open and Closed Oligopolies : If

entry is open to new firms it is termed
as Open Oligopoly, and if entry is
strictly restricted it is termed as
Closed Oligopoly.
3. Collusive Oligopoly : If the firms under oligopoly
market combine together instead of competing it is
known as Collusive Oligopoly. The collusive may
take place in the form of a common agreement or an
understanding between the firms.

4. Partial and Full Oligopoly : Partial oligopoly is

formed when the dominant firm which is the price
leader and all other firms follow the price of the
price leader. If no firm acts as a price leader then it
is called Full Oligopoly.
Types of oligopoly( w.r.t
category)
 COLLUSIVE OLIGOPOLY
• oligopoly in which two or more than
two firms are making an agreement
or determination of price and output.

• Supply is curtailed so that the price

does not go low.
Types of collusive oligopoly
 cartel

• In which two or more than two firms

are making an agreement on
determination of price and output
• Shortest way of controlling/earning
profit by controlling the supply.
 Cartel as a monopolist

MC

p
Dollars per unit

MR

Quantity per period

0 Q
 Cartel as a monopolist

A cartel acts as a monopolist.

Here, D is the market demand curve, MR the associated
marginal revenue curve, and MC the horizontal sum of the
marginal cost curves of cartel members (assuming all
firms in the market join the cartel).
Cartel profits are maximized when the industry produces
quantity Q and charges price p.
 Examples of Cartels

• Example of Walls and Olpers products.

Olpers has come up with a new product of
Omore ice cream which is giving tough
competition to Walls ice cream
Result is a 30%-40% decrease in the profits of
Walls within a period of 6 months.
 Profit sharing cartel
• Collusive pricing model reveals that firms in the market agree
on production limits and set a common price to maximize the
joint profit.

• When firms collude and agree on common price so mostly

they earn Economic profit.

• It is assumed here that firms have identical cost data and same
demand and thus Marginal revenue data.
 Difficulties in collusion
• Collusion among Corporations is difficult because of;

• Demand and Cost Differences among Seller

• The Complexity of Output Coordination among Producers
• The Potential for Cheating
• The Potential Entry of New Firms
 MARKET SHARING CARTEL
• Gives each member the right to
operate in a particular geographic
area.

• Most notorious example of this

cartel:
• Du pont and Imperial chemicals
agreeing to divide market.
 Price leadership
• The firms in the Oligopolistic industry without any formal
agreement accept the price set by the leading firm in the industry
and move their prices in line with the prices of the leader firm.

• Price Leadership can be in any of the forms;

• Price Leadership by a Dominant firm

• Barometric Price Leadership
• Aggressive or Exploitative Price Leadership
 Equilibrium under Price Leadership
MC b
Revenue/ Cost/

B
Prices

A MC a

MR
0 Y X Output
 Non collusive oligopoly
• That oligopoly in which two or more firms are making
an independent decision about their price and output
determination, keeping in view the reaction of other
firms operating in the market.
• One firm’s action effects other firm’s profit
• The response is to be kept under considered during
the competition analysis because say if the supply by
all the firms exceeds demand the price would go down
and adversely affect all the firms in the market.
 Models in non-collusive
oligopoly
• Cournot Model

• Bertrand model

• Chamberlin model

• Kinked Sweezy model

• Stackleberg model
Because of interdependence , an oligopolistic firm
cannot assume that its rival firms will keep their
quantities constant when it makes changes in price
or quantity. When an oligopolistic firm changes its
prices, its rival firms would retaliate and change
their prices which in turn would affect the demand of
the former firm.

Economists have established a number of price-output

models for Oligopoly market, depending upon the
behaviour pattern of the members of the group. A
few important ones are as follows :
1. Avoidance of Interdependence : Some economists have
assumed that oligopolist firms ignore interdependence . When
interdependence disappears from decision making the demand
curve facing the oligopolist becomes determinate.

2. Price Leadership : Another approach is that the firms in an

Oligopoly would accept one firm as a leader and would follow him
in setting prices. Such a leader firm may be dominant or low-cost
firm producing a very large proportion of the total production and
having a great influence over the market.
3. Price Wars : Some economists
assume that an oligopolist is able to
predict the counter moves of his rivals,
and they provide a determinant
solution to the price and output
problem.

4. Game Theory : In the theory of games,

the oligopolistic firms does not guess at it’s
rivals reaction pattern, but calculates the
optional moves by rival firms. It calculates
their best possible strategies and in view of
that adopts its policies and counter moves.
5. Non-price competition : Since the oligopolists
face the danger of retaliation in price cut
competition, they resort to non-price competition.
This can take the from of advertising, sales
promotion , improvement of the product etc.

6. Secret Price Concessions : Since an open

price cut is retaliated by rivals, some oligopolists
offer secret price concessions for selected buyers.

From the above analysis it is clear that there is no

single determinant solution to the price output
fixation under Oligopoly. The fixing of price under
oligopoly market situation is very difficult.
In many oligopolistic industries, prices remain
sticky or inflexible for a long time even though
the economic conditions change. Many
explanations have been given for this price
rigidity under Oligopoly and the most
population explanation is the Kinked Demand
Curve Hypothesis given by an American
economist Paul Sweezy.
According to the kinked demand
curve hypothesis, the demand
curve facing the Oligopolist has
a ‘Kink’ at the level of the
prevailing price. The kink is
formed at the prevailing price
level because the segment of the
demand curve above the
prevailing price level is highly
elastic and the segment of the
demand curve below the price
level is inelastic.
The figure shows a kinked demand curve dD with a kink at
point k. the prevailing price is OP and the firm produces
and sells OQ output. The upper segment dk of the demand
curve dD is relatively elastic and the lower segment kD is
relatively inelastic.

The differences in elasticity's is due to the particular

competitive reaction pattern assumed by kinked demand
curve hypothesis. The assumed pattern is “Each
Oligopolist believes that if he lowers the price below the
prevailing level, his competitors will follow him and
accordingly lower their prices, whereas if he raises the
price above the prevailing level, his competitors will not
follow his increase in price”
A } Price Reduction : If an oligopolist reduces the
price below the prevailing price to increase sales, the
competitors will fear that their customers would go
away from them and buy from the firm which has made
a price cut. Therefore, in order to retain it’s customers,
they will also lower the prices. Besides the competitors
quickly follow the price reduction by an oligopolist, he
will gain only very little sales.

Thus the segment kD of the demand curve which his

below the prevailing price OP is inelastic showing that
very little increase in sales is obtained
B } Price Increase : If an oligopolist raise
the price above the prevailing price level,
there will be a substantial reduction in
sales. as a result of price rise, its customers
will withdraw from it and go to its
competitors who welcome new customers
will gain in sales. The oligopolist who raises
its price will lose a great deal and therefore,
refrain from increasing price.

The segment dK of the demand curve which

lies above the current price level OP is
elastic following a large fall in sales if a
producer raises his price.
Each oligopolist will find himself in such
a situation that on one hand, he
expects rivals to match his price cuts
very quickly and on the other hand,
he does not expect his rivals to match
his price increase .

Given this expected competitive

pattern, each oligopolist will have a
kinked demand curve dD, with the
upper segment dK being relatively
elastic and the lower segment kD
being relatively inelastic
C } Price Rigidity : An oligopolist
facing a kinked demand curve will have
no incentive to raise its price or lower it.
The Oligopolist will not gain any larger
share of the market by reducing his
price below the prevailing level. There
will be a substantial reduction in sales if
he increasing the price above the
prevailing level. Each Oligopolist will
adhere to the prevailing price seeing no
gain in changing it.
The prevailing price is OP at which a kink is
found in the demand curve dD . The price
OP will remain stable or rigid as every
Oligopoly firm will find no gain to lower it
or increase it. Thus rigid or sticky prices
are explained according to the kinked
demand curve theory.
1. The oligopoly model provides a theoretical
explanation as to why stable prices exist in oligopolistic
industries. But it takes prevailing prices as given and
provides no justification as to why that price level
rather than some other is the prevailing price
i.e. the kinked demand model can be viewed as incomplete.

2. Stigler had tested the kinked demand curve

empirically on several oligopolies. He found that
oligopolistic rivals are just as likely to follow price
increase as price decreases indicating little support for
the kinked demand curve.
3. The kinked demand Oligopoly theory
does not apply to oligopoly cases of price
leadership and price cartels.

4. In case of pure oligopoly, the kinked

demand curve does not provide adequate
explanation for price rigidity.

5. The explanation of price stability by

Sweezy’s kinked demand curve theory
applies to depression periods. In periods
of boom and inflation, when the demand
for the products increase, price is likely
to rise rather than remain stable.
THANK YOU FOR YOUR PATIENCE……..
ANY
QUERIES????????