Managerial Economics - Market Structure
Oligopoly Market - Market Structure
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This is a market consisting of a few firms relatively large firms, each with a substantial share of the market and all recognizing their interdependence.
Oligopoly
Market
This is a market consisting of a few firms relatively large firms, each with a substantial share of the market and all recognizing their interdependence. It is a common form of market structure. The products may be identical or differentiated. The price determination and profit maximization is based on how the competitors will respond to price or output changes.
1.Pure and perfect oligopoly: if the firm produced homogeneous products it is perfect oligopoly. If there is product differentiation then it is called as imperfect or differentiated oligopoly.
2.Open and closed oligopoly: entry is not possible. When it is closed to the new entrants then it is closed oligopoly. On the other hand entry is accepted in open oligopoly.
3.Partial and full oligopoly: under partial oligopoly industry is dominated by one large firm who is a price leader and others follow. In full oligopoly no price leadership.
4.Syndicated and organized oligopoly: where the firms sell their products through a centralized syndicate. On the other hand firms organize themselves into a central association for fixing prices, output and quotas.
Characteristic Features Of An Oligopoly Market:
1. Few sellers
2. Lack of uniformity in the product
3. Advertisement cost is included
4. No monopoly competition
5. Firms struggle constantly
6. There is interdependency
7. Experience of Group behavior
8. Price rigidity
9. Price leadership
10. Barriers to entry
Price rigidity: the price will be kept unchanged due to fear of retaliation and prices tend to be strict and inflexible. No firm would indulge in price cutting as it would eventually lead to a price war with no benefit to anyone.
Reasons for rigidity are: firms know ultimate outcome of price cutting; large firms incur more expenditure than others; keeping the price low to reduce the new entrants; increased price rise leads to reduction in number of customers.
The oligopoly prices are indeterminate. The demand function is then an important ingredient in the price determination mechanism. Several theories of oligopoly prices have been developed and each one of them is based on a particular assumption about the reactions of the rival firms and the firms’ actions. The popular models and appropriate classifications are discussed below.
1.Cournot oligopoly: There are few firms producing differentiated or homogeneous products and each firm believes that competitors will hold their output constant if it changes its output.
2.Stackelberg oligopoly: Few firms and differentiated or homogeneous product. The leader chooses an output and others follow.
3.Bertrand oligopoly: Few firms produce identical product. Firms compete in price and react optimally to competitor’s prices.
This is a market consisting of a few firms relatively large firms, each with a substantial share of the market and all recognizing their interdependence. It is a common form of market structure. The products may be identical or differentiated. The price determination and profit maximization is based on how the competitors will respond to price or output changes.
There Are Different Types Of Oligopoly:
1.Pure and perfect oligopoly: if the firm produced homogeneous products it is perfect oligopoly. If there is product differentiation then it is called as imperfect or differentiated oligopoly.
2.Open and closed oligopoly: entry is not possible. When it is closed to the new entrants then it is closed oligopoly. On the other hand entry is accepted in open oligopoly.
3.Partial and full oligopoly: under partial oligopoly industry is dominated by one large firm who is a price leader and others follow. In full oligopoly no price leadership.
4.Syndicated and organized oligopoly: where the firms sell their products through a centralized syndicate. On the other hand firms organize themselves into a central association for fixing prices, output and quotas.
Characteristic Features Of An Oligopoly Market:
1. Few sellers
2. Lack of uniformity in the product
3. Advertisement cost is included
4. No monopoly competition
5. Firms struggle constantly
6. There is interdependency
7. Experience of Group behavior
8. Price rigidity
9. Price leadership
10. Barriers to entry
Price rigidity: the price will be kept unchanged due to fear of retaliation and prices tend to be strict and inflexible. No firm would indulge in price cutting as it would eventually lead to a price war with no benefit to anyone.
Reasons for rigidity are: firms know ultimate outcome of price cutting; large firms incur more expenditure than others; keeping the price low to reduce the new entrants; increased price rise leads to reduction in number of customers.
The oligopoly prices are indeterminate. The demand function is then an important ingredient in the price determination mechanism. Several theories of oligopoly prices have been developed and each one of them is based on a particular assumption about the reactions of the rival firms and the firms’ actions. The popular models and appropriate classifications are discussed below.
Oligopoly Models:
1.Cournot oligopoly: There are few firms producing differentiated or homogeneous products and each firm believes that competitors will hold their output constant if it changes its output.
2.Stackelberg oligopoly: Few firms and differentiated or homogeneous product. The leader chooses an output and others follow.
3.Bertrand oligopoly: Few firms produce identical product. Firms compete in price and react optimally to competitor’s prices.
4.Sweezy
oligopoly: An industry in which there are few firms serving many consumers.
Firms produce differentiated products and each firm believes competitors will
respond to a price reduction but they will not follow a price increase.
Tags : Managerial Economics - Market Structure
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