Oligopoly

1
Oligopoly
2
Oligopolistic Market Structure

• Number of firms Small number of sellers.
• Product differentiation Homogenous or
  differentiated product
• Ease of entry into the market by new firms
  Barriers to entry
• Form of competition Competition can vary based
  on the differentiation of product and market
  share of each competitor.

3
Varieties of Oligopoly

• Interdependence The sensitivity of each firm in
  the industry to the pricing policies of other
  firms in the industry.
• Homogenous Oligopolistic Industries
• Standardized product and demand curve
• Level of interdependence
• Differentiated Oligopolistic Industries
• Differentiated product and demand curve
• Level of interdependence

4
Barriers to Entry and Cost Advantages

• Barriers to entry are the same as the barriers
  for monopolies.
• Economies of Scale is the most significant
  barrier
• Technological and cost advantages of large scale
  production.
• High cost of entry
• Total cost of achieving the minimum efficient
  scale is prohibitive
• Differentiated industries can incur large costs
  when establishing product identity.

5
Models of Oligopoly

• Competition between firms depends on the level of
  interdependence.
• Models of Oligopoly include
• Game Theory
• Collusion and Cartels
• Price Leadership
• Cost-Plus Pricing

6
Collusion and Cartels

• In order for firms to act as a cartel
• Product must be standardized
• They must determine the MC of production for the
  cartel
• Output must be allocated so that each firms MC
  of production is the same
• Problems with maintaining a cartel
• Differences in cost
• Number of firms in the cartel
• Cheating

7
Price Leadership

• Price leadership
• Is an informal type of collusion
• Avoids competition between firms
• Obstacles
• US antitrust laws
• Participation
• Degree of Differentiation
• Cheating

8
Cost-Plus Pricing

• Firms price by calculating the ATC and then
  adding a percentage markup to create a profit
• Advantages of cost-plus pricing
• Avoids cost of determining demand curve
• Avoids cost of determining MC and MR for each
  product
• Markup-rule simplifies pricing strategy
• It creates a type of collusion

9
Comparison of Oligopoly and Perfect Competition

• Price Under Oligopoly.
• Collusion and Price.
• Differentiation and Price
• Price wars
• Profits under Oligopoly.
• Barriers to entry keep economic profits from
  going to zero in the long run for oligopolists.

10
Mergers and Oligopoly

• Mergers occur for several reasons
• Increase Market Share
• Combine production and cut costs
• Increase control over suppliers of inputs or
  buyers of their outputs
• Expand and diversify the markets in which they
  can earn more profits
• Types of mergers
• Horizontal
• Vertical
• Conglomerate