OLIGOPOLY

MANAGERIAL
ECONOMICS
Chapter-12
Group 5
GROUP#05
1.KASHIF JAVED
3123999051
2.MUHAMMAD NOUMAN KHAWAR
3123999120
3. ABDELBASSID ISSA
3123999008
OLIGOPOLY
Strategic Thinking for Maximum Impact
MOTORCYCLE
BRANDS
SHOES BRANDS
SOFT DRINKS
OligoPoly
• Derived from two Greek words,
Oligi (Same) and Polien (To sell)
An Oligopoly is characterized by a relatively small

number of firms offering a similar product or service.
TYPES
Perfect/Pure Imperfect/Differentiated
when the firms produce when the firms produce
homogeneous products. Differentiated products.
i.e. Cement, steel, i.e. Passenger Cars, soft
chemicals, petroleum drinks etc.
etc.
Features
1- Few Firms
2-Interdependence
3-Non-Price competition
4- Barriers to entry
5-Selling Cost
Oligopoly in the United
States: Relative Market
Shares
Over the 14-year period 1992–2005, the rank order of the leading airlines was largely
unchanged, but every one of the major hub-and-spoke carriers lost two to three share
points to the point-to-point discounters Southwest and America West.
INTERDEPENDENCIES
IN OLIGOPOLISTIC
INDUSTRIES
Cournot Model
• French Economist Augustin Cournot (1838) created a
model that is the basis of Anti-trust Policy in the US.
• Firms producing identical product independently &
Simul.
• Two Firms, Homogeneous
• Compete in quantity rather than price
Cournot’s Model
Exercise Problem
Solution:
Cournot duopoly problem for firms C and D with different TC
curves.
CARTELS AND OTHER FORMS OF
COLLUSION
• Sometimes these firms reduce the inherent risk of being
so interdependent by either formally or informally
agreeing to cooperate or collude in decision-making.
Collusive agreements between oligopolists are called
cartels.
• In general, collusive agreements are illegal. However,
there are some exceptions exists.
CARTELS EXAMPLES
• Prices of various agriculture products like Wheat, milk, and oranges are set
by the approval of government.
• The International Air Transport Association (IATA) airlines flying
transoceanic routes jointly set uniform prices for these flights.
• The International Tin Council was established to stabilize tin prices and
regulate the supply of tin on the global market.
• In 2008, LG Electronics paid a $400 million fine (the second-largest
antitrust fine ever) for conspiring with Sharp ($129 million) and Chunghwa
Display to fix the wholesale price of LCD monitors in laptops, cell phones,
and televisions.
Factors Affecting the Likelihood
of Successful Collusion
• Number and Size Distribution of Sellers
• Product Heterogeneity
• Cost Structures
• Size and Frequency of Orders
• Threat of Retaliation
• Percentage of External Output
Cartel Profit Maximization and the
Allocation of Restricted Output
• Firms use cartels to increase price and profits which
cannot be possible without collusion.
PRICE
LEADERSHIP
Introduce the Price Leadership concept and then its
different forms like,
• Barometric Price Leadership
• Dominant Firm Price Leadership

Kinked Oligopoly Demand Curve
Belief in price rigidity founded on experience in the Great Depression that
oligopolies (like the cigarette industry) didn't reduce prices, but competitive
industries cut prices.
Price cuts lead to everyone following
highly inelastic
In price increases, no one follow
highly elastic
AVOIDING PRICE WARS
Knowing how to avoid a price war has become a critical success factor for many high margin businesses in
tight oligopolistic groups.
1-Growing the Market

One key to avoiding price wars in tight oligopolies is to recognize the ongoing nature of the pricing rivalry
and attempt to mitigate the intensity of the price competition by growing the market.
2- Customer Segmentation with Revenue Management
3-Reference Prices & Framing Effects

People are psychologically impacted by comparisons
Their price is $49, but ours is just $29!
Bewared that discounting in one period can make them reset their reference.
4-The Role of Innovation

Differentiation through innovation is harder for competitors to match
Exercice 2 (case study)
• Answer this managerial case study
• CELL PHONES DISPLACE MOBILE PHONE SATELLITE NETWORKS21
Motorola's Iridium, a go-anywhere mobile phone system that beamed signals down from 66 satellites, was called "the
eighth wonder of the world" by Motorola CEO
Chris Galvin. However, at $1,500 for a handset the size of a brick, consumers balked, and few business customers
needed the security and reliability offered in remote corners of the globe like Katmandu or Tibet. As a result, Motorola's
25 percent market share in cell phones declined steadily to 13 percent in 2001, and Motorola stock fell 16 percent from
1997-2001, during a period when the S&P 500 was up 76 percent.
Questions
1.Characterize the product space for mobile phones when Iridium began.
2.What trends did Nokia pursue as it designed mobile phone products in the late1990s?
(refer to the Managerial Challenge at the beginning of this chapter.)
3. What might a more proactive Motorola have done differently had it correctly perceived the steps its rival Nokia
would take?
4. Smart phones from Apple and RIM today have imposed upon Nokia competitive pressure once associated with
Motorola. What would you advise Nokia to do in light of the success of the iPhone with all its thousands of applications
from independent software providers?
ANY
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MANAGERIAL

An Oligopoly is characterized by a relatively small

• Barometric Price Leadership

• Dominant Firm Price Leadership

Price cuts lead to everyone following

In price increases, no one follow

1-Growing the Market

2- Customer Segmentation with Revenue Management

3-Reference Prices & Framing Effects

4-The Role of Innovation

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