Oligopoly1 (1)

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Amity Business School

MODELS OF OLIGOPOLY

Presented To : Presented By:

Prof. S K Laroiya Deboleena Kunar C- 15Kirti Mahansaria C 19

Varun Gupta C- 41

Mayank Badkul C- 47

Sahil Gupta C-48

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Table of Contents1. Introduction On Market2. Oligopoly

3. Causes For Existence Of Oligopolies

4. Models Of Oligopoly:-1. Kinked Model

2. Collusion

3.The Cartel Model

4. Price Leadership5. Cournet and Bertrand model

6. Nash equilibrium

5. Drawbacks Of determining price output relationship

6. OPEC: Most Successful Cartel

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Amity Business SchoolIntroduction

What is a market?In the words of Cournet, a French economist economics understand by

the term market not any particular place in which things are bought and

sold but the whole of any region in which buyers and sellers are in such

free intercourse with on another that the price of same goods tends to

equality easily and quick

Types ofMarket

Monopoly

Oligopoly

Perfect competition

Monopolistic

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An oligopoly is a market form in which a market or industry is

dominated by a small number of sellers (oligopolists). The wordis derived, by analogy with "monopoly", from the Greek (oligoi) "few" + (polein) "to sell. Hence oligopoly refersto as "competition among the few

Oligopoly??

Oligopoly

Pure oligopolyDifferentiated

oligopoly

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Characteristics of oligopoly

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Causes for existence ofoligopoly

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Amity Business SchoolKinkedKink:- A sharp bend in a line produced when a line having a loopis pulled tight.

It is formed at the prevailing price level because the segmentof the demand curve above it is highly elastic as compared to thepart below it.

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The competitors will reduce out of fear Due to this the increase in sales will be of

less durationPricereduction

Substantial reduce in sales.

Customers will go to competitors. Only those customers will stay back whoare attached to the product .Price increase

prevailing price

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Amity Business SchoolFactors affecting

kinked Oligopoly

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Amity Business SchoolCollusion

Acting together in secret toward an illegal end

for al tacticstypes

The price & output policy isjointly decided

One fir sets the price andothers follow

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Amity Business SchoolCartel

All types of formal and tactics agreements

Central Administrative authority

Secure maximum joint profits

Profits distribution and output quota are decided unanimously

How cartel works??

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Marketsharing

Profit as well asthe output is

determined bycentral authority

Very rare evenin illegal world.

They have to betight not loose.

Pricesharing

The price is the

only constraint,not the output

They can havedifferent

advertisingpolicy.

In case ofconflicts, costbargain may

occur.

They areunstable

OutputQuota

Agreement ofquota of outputon the basis ofagreed upon

price.

In case ofhomogeneousproducts thecost is sameotherwise its

not.

Instablecartel

The low costfirms tend to

reduce the costof products

The newentrants tend todisturb the price

balance

Types of cartels

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Price leadershipEstablished as a result of informal and tacit understandingbetween the oligopolists.

Price leadership by a low cost firm

Low cost firm sets a lower price than the profit maximizingprice of high cost firms

Since the high cost firms will not be able to sell theproduct at the higher price ,they are forced to agree to the

low price set by the low cost firm.Of course low price leader has to ensure that the pricewhich he sets must yield some profits to the high cost firm their followers

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Price output determination under lowcost price leadership

In order to simply our analysis we make following assumptions

There are two firms A and B . The firm A has lower cost ofproduction than B.

The product produced by the two firms is homogenousso that consumers have no preference between them.

Each of the two firms has equal share in the market. Inother words demand curve facing each other will behalf of total market demand curve of the product.

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Price output determination

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Price leadership by dominant firm

Under this one of the few firm may be producing a verylarge proportion of total production of the industry andtherefore dominate the market.

Other firms are small and incapable of making anyimpact on the market.

Dominant firm fix estimates own demand curve and fixesa price which maximizes its own profit.

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Barometric price leadershipUnder this model an old ,experienced, largest or mostrespected firm assumes the role of a custodian whoprotects the interest of all.

He sets the price with regard to demand for product,cost of production ,completion for from related productsand sets a price which is best from viewpoint of industry.

All firms follow willingly

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Cournet and Bertrand modelIn these model oligopolistic firms ignoreinterdependence.

In Cournet model oligopolistic firm would set its output in

the belief thats its rival firm output would remain constant.Bertrand model assumed that its rivals will keep theirprice constant.

Example. Market has demandP = 30 Q,with two firms, soQ = Q1 + Q2,assume that there is no fixed cost and marginal cost,

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MC1 = MC2 =0.Firm 1 would like to maximize its profitP Q1

2

15

;2

Q-15Q

0)*)30((

dQ

d

12

21

121

1

QQ

QQQ

!

!

!

Solving 2 equations we getQ1=10Q2=10

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Amity Business SchoolGame theory

Game theory is a branch of applied mathematics that is used inthe social sciences, most notably in economics.

Attempts to Mathematically capture the behavior in strategic

situations, in which an individual's success in making choices

depends on the choices of others.

Traditionally it was used to find equilibrium in the above

situations where each player adopts a strategy that does not

change .

Nash Equilibrium being the most famous.

The field of game theory came into being with mile Borel's

researches in his 1938 bookApplications aux Jeux des Hazard,

and was followed by the 1944 bookTheory of Games and

Economic Behaviourby John von Neumann and Oskar

Morgenstern.

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Amity Business SchoolTypes

Extensive formGameHere the order of operations is very important.

Player 1 moves first and chooses eitherForU. Player2sees Player 1's move and then chooses A orR. Suppose

1 chooses Uand then Player 2chooses A, then Player1 gets 8 and Player 2gets 2.

Normal Form Game

The players can act simultaneously.

The players do not know about other persons strategy.Characteristic function form

In this form co-operation amongst the players is present.

Partition function form

All the possibilities of coalition are ignored.

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Co-operative and non co-operative games

Firms can arrive at an enforceable or binding contractthat permit them to adopt a strategy to maximize jointprofits.

Due to conflicts in the interests two firms cannot sign a

binding contract.Infinite long games

Are generally finished in finitely many moves.

The focus of attention is usually not so much on what is

the best way to play such a game, but simply on whetherone or the other player has a winning strategy.

Perfect information and imperfect informationgames

A game is one perfect information if all players know the

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Nash EquilibriumNash equilibrium , named after John Forbes Nash, is

a solution concept of a game.

Describes a set of strategies where each player

believes that he is doing his best, given the strategy of

the other person or player.

Since each is doing the best, given others strategy and

no one has a tendency to change it unilaterally, there

exists Nash equilibrium

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The Prisoners DilemmaIt was originally framed by Merrill Flood and MelvinDresher working at RAND in 1950. Albert W.Tucker formalized the game with prison sentence payoffs

and gave it the "prisoner's dilemma" name (Poundstone,1992).

It explains how rivals behaving selfishly act contrary totheir mutual or common interests.

Without enforceable agreements, members ofa cartel are also involved in a (multi-player) prisoners'dilemma

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Drawbacks in determiningprice output relation

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OPECOrganization of petroleum Exporting countries (OPEC)

was formed in 1960.

Initially it contained only 5 members, the membership of

cartel however expanded to 13 by 1973.

The situation underwent a dramatic change in 1973 withthe Arab-Israel war.

The estimated price of a barrel of oil on the world market

was $2.91 in 1973 but jumped to $10.77 in 1974.Another jolt was inflicted in 1978 when revolution tookplace in Iran. Iranian exports at that time accunted for 20

percent of all OPEC ex-ports, fell almost to zero.

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Reasons for success of OPEC

Price inelasticity of demand for oil

Substantial market power

Few members

Policies of oil importing nations

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0

5

10

15

20

25

30

35

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02

$ er rrel Actu l riceost in 1973 rices

Yom Kippur

War: rab oil

embargo

First oil from

North Sea

Revolution

in Iran

Iraq invades

Iran OPECs first

quotas

Cease-fire in

Iran-Iraq war

Recessionin Far East

Iraq invades

Kuwait

New OPEC

quotas

World-widerecovery

World-wide

slowdown

Impending

war

with Iraq

Oil rices

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References http://en.wikipedia.org/wiki/Oligopoy

Managerial Economics : G S Gupta

Managerial Economics: H L Ahuja

http://www.apsva.us/15722093173654360/lib/15722093173654360/theoryofOligopoly

http://www.google.co.in/search?hl=en&q=kinked+oligopoly&sourceid=navclient-

ff&rlz=1B3MOZA_enIN397IN397&ie=UTF-8

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Thank you!!

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