oligopoly

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OLIGOPOLY

Oligopoly is a market with a few sellers. Fewness means in this market number of firms is such that one firm’s action affects the other firms in the market. Hence whenever any firm makes any decision regarding price etc, it has to take into account the behavioural response of the other. This main feature of oligopoly is called interdependence. This interdependence brings forth the need for strategic decision making. Strategic decision making involves conjectural variation. Conjectural variation implies one firm’s assumption about the response of other firms to its action. Suppose there are two firms A and B. Suppose A wants to produce more. In order to judge whether this decision of increasing production is gainful or not A has to conjecture how B will react to this decision. This is conjectural variation. The nature of the equilibrium changes with change in conjectural variation pattern.

In oligopoly firms have several decision variables. It can decide on quantity, price, quality of product, advertisement, investments, timing of entry in the market etc. Existence of so many decision variables gives rise to many models of oligopoly.

Two basic models of oligopoly are Cournot model and Bertrand model. Cournot model is based on two basic assumptions. 1. Firms compete with quantity, not the price. 2. Conjectural variation of the firms is zero i.e. firms assume when it changes quantity other firm will keep its output unchanged. In other words firm will derive its optimising strategy on the assumption of a given behaviour of the other firm. Bertrand model also assumes zero conjectural variation but it considers price competition, not quantity.

Cournot model
Earliest model of oligopoly is the Cournot model. To analyse this model we make the folowing assumptions.
1. There are two firms in the market.
2. Firms determine their output level and prices are determined in the market.
3. Conjectural variation of the firms is zero i.e. firms optimize,

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