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    CHP 8 - Oligopoly

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    Ewan Ridzwan
    The document defines oligopolies as markets dominated by a few large firms that are interdependent in their decision making and take into account how other firms may react. It provides characteristics of oligopolies, including few firms, price rigidity, mutual interdependence, homogeneous or differentiated products, barriers to entry, and non-price competition through tactics like advertising. It also discusses Sweezy's kinked demand curve model of oligopolistic interdependence and price rigidity.

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    CHP 8 - Oligopoly

    Uploaded by

    Ewan Ridzwan
    83 views11 pages
    The document defines oligopolies as markets dominated by a few large firms that are interdependent in their decision making and take into account how other firms may react. It provides characteristics of oligopolies, including few firms, price rigidity, mutual interdependence, homogeneous or differentiated products, barriers to entry, and non-price competition through tactics like advertising. It also discusses Sweezy's kinked demand curve model of oligopolistic interdependence and price rigidity.

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    Oligopoly

    Original Title

    Chp 8- Oligopoly

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    The document defines oligopolies as markets dominated by a few large firms that are interdependent in their decision making and take into account how other firms may react. It provides characteristics of oligopolies, including few firms, price rigidity, mutual interdependence, homogeneous or differentiated products, barriers to entry, and non-price competition through tactics like advertising. It also discusses Sweezy's kinked demand curve model of oligopolistic interdependence and price rigidity.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    83 views11 pages

    CHP 8 - Oligopoly

    Uploaded by

    Ewan Ridzwan
    The document defines oligopolies as markets dominated by a few large firms that are interdependent in their decision making and take into account how other firms may react. It provides characteristics of oligopolies, including few firms, price rigidity, mutual interdependence, homogeneous or differentiated products, barriers to entry, and non-price competition through tactics like advertising. It also discusses Sweezy's kinked demand curve model of oligopolistic interdependence and price rigidity.

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    © All Rights Reserved
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    of 11

    Definition

    Oligopolies are made up of a small number of mutually


    interdependent firms, using strategic decision making,
    that take into account the expected reaction of other
    firms

    Example: petroleum industry, airplanes makers, steel


    industry and automobile industry

    Aidarohani Samsudin 1
    Characteristics of Oligopoly
     Few large firms
    An oligopoly is a market dominated by a few large
    suppliers who controlling the industry

     Price rigidity/ stickiness/stability


    If any firm makes a price-cut it is immediately
    retaliated by the rival firms by the same practice of
    price-cut. Hence under oligopoly no firm resorts to
    price-cut without making price-output decision with
    other rival firms.

    Aidarohani Samsudin 2
    Cont..
     Mutual interdependence of firms
    The firms under oligopoly are interdependent in
    making decision because the number of competition is
    few and any change in price & product etc by an firm
    will have a direct influence on the fortune of its rivals,
    which in turn retaliate by changing their price and
    output. Thus under oligopoly a firm not only considers
    the market demand for its product but also the
    reactions of other firms in the industry.

    Aidarohani Samsudin 3
    Cont…
     Homogenous @ Differentiated products
    Product are similar but firm try to differentiate it
    through branding, for instance.

     Barriers to entry
    government regulations, patent rights or franchise

     Non-price competition
    Advertising
    Packaging
    Product differentiation
    After-sale service
    Aidarohani Samsudin 4
    Sweezy’s Model
     Used to explain the kinked demand curve and
    price rigidity in the oligopoly model
    (mutual interdependence between firms)

    Assumptions:
    1. If the firm were to increase its price, other firms
    will not follow (demand curve is elastic)
    2. If the firm were to reduce price, other firms will
    follow to avoid losing the market share
    (demand curve is inelastic)
    Aidarohani Samsudin 5
    Diagram: Oligoploly

    a
    Kinked Demand
    b
    P

    D1 (Elastic demand)
    c
    Price

    d
    MR1
    D2 (inelastic Demand)
    0
    Q MR2
    Quantity

    Aidarohani Samsudin 6
    Cont…

    Aidarohani Samsudin 7
    Calculating profit for Oligopoly Market Structure
    Price of X
    MC

    AC
    30

    22

    15
    10
    AR
    5

    Quantity of X
    10 15 18
    Qe = 10 (at MC=MR) MR
    Pe/ AR = RM22 (at Qe)
    AC/ATC= RM30

    Thus, profit = Qe(AR-AC)


    = 10 (RM22-RM30)
    = -RM80 (-ve, <1, so Subnormal Profit)
    Aidarohani Samsudin 8
    Cost/Price/Revenue (RM)
    (RM)

    MC1
    14 MC2

    AC

    10

    8
    6

    4
    (i)

    35
    Output ( units )

    a) Label curve (i) and (ii) (ii)

    b) Determine the profit maximizing price and output

    c) Suppose production cost of the firm increases from MC1 to MC2, what is the
    new equilibrium output and price?

    d) Calculate total profit at the equilibrium and name type of profit the firm is
    making

    e) State two (2) assumptions of the above oligopoly model

    f) This oligopolistic model is also known as _______________ model


    Aidarohani Samsudin 9
    Assignment 1
    Draw diagrams to show a long run and short run
    profit(s) for all market structure.

    Market Short-run Profit Long-run


    structure Profit
    Normal Supernormal Subnormal

    Perfect
    Competition

    Monopoly

    Monopolistic
    Competition

    Oligopoly

    Aidarohani Samsudin 10
    Assignment 2
    Fill in the column

    Characteristic Number Control Type of Degree of Other


    Structure of firms Over Price Product Entry & Exit Attributes
    Perfect Competition
    Monopolistic
    Competition
    Oligopoly
    Monopoly

    Aidarohani Samsudin 11

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