Oligopoly
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Transcript of Oligopoly
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OLIGOPO
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WHAT IS OLIGOPOLY?
• Oligopoly lies between perfect competition and monopoly
• Few number of companies on the market
• Produce identical products and compete on price, product, quantity and marketing
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BARRIERS TO ENTRY
• Natural barriers to entry - when the market is not big enough for more firms
Example: Suppliers of milk in a small city; Local newspaper, etc.
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NATURAL BARRIERS TO ENTRY
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LEGAL BARRIERS TO ENTRY
• Occurs when a legal barrier protects a small number of companies
• Example: A city might license only two taxi companies even though the market is big enough for more
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SMALL NUMBER OF FIRMS
• Small number of firms because of barriers
• Each has a large share of the market
• Companies are interdependent and can cooperate to have larger profits
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INTERDEPENDENCE
• Each firms actions influence the other firms’ profits
• If one firm lowers its prices it gains more market share and the other companies loose profits.
• Profit depends on other companies actions.
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COOPERATION
• A small number of companies in a market tend to cooperate
• They can form a cartel.
• A cartel is a group of firms acting together – colluding – to limit output, raise price and increase economic profit.
Cartels are illegal in EU and most of the countries.
OPEC is an example of international cartel
• Cartels are hard to maintain and even official cartels brake down
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DUOPOLY
• Duopoly is a type of Oligopoly where only two firms copete on the market
• INTEL and AMD
• BOEING and AIRBUS
• Highly competative market
• The firms are able to influence the fortunes of each other
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MODELS EXPLAINING OLIGOPOLY
KINKED DEMAND CURVE MODEL
• Based on the assumption that each firm believes that if it raises its price, others will not follow, but if it cuts its price, other firms will cut theirs
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MODELS EXPLAINING OLIGOPOLY
DOMINANT FIRM MODEL
• The dominant firm – has a big cost advantage over the other firms and produces a large part of the industry output.
• The dominant firm sets the market price and the other firms are price takers
• Example: large petrol retailer
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Thank you for your attention!