ROLL NUMBER : 028
TOPIC: COMPARATIVE ANALYSIS OF MARKET STRUCTURE
DATE: 8TH NOVEMBER 2014
An Oligopoly is an industry dominated by a few firms, e.g. supermarkets, petrol, car industry etc.
The main features of oligopoly:
An industry which is dominated by a few firms.
Interdependence of firms, firms will be affected by how other firms set price and output.
Barriers to entry, but less than monopoly.
Differentiated products, advertising is often important
Most common market structure
Firms in Oligopoly
There are different possible ways that firms in oligopoly will compete and behave this will depend upon:
The objectives of the firms e.g. profit maximisation or sales maximisation
The degree of contestability i.e. barriers to entry
The Kinked Demand Curve Model
This model suggests that prices will be fairly stable and there is little incentive to change prices. Therefore, firms compete using non-price competition methods.
This assumes that firms seek to maximise profits
If they increase price, then they will lose a large share of the market because they become uncompetitive compared to other firms, therefore demand is elastic for price increases.
If firms cut price then they would gain a big increase in market share, however it is unlikely that firms will allow this. Therefore other firms follow suit and cut price as well. Therefore demand will only increase by a small amount: Demand is inelastic for a price cut.
Therefore this suggests that prices will be rigid in oligopoly
The below diagram suggests that a change in marginal Cost still leads to the same price, because of the kinked demand curve remember profit max occurs where MR = MC)
Evaluation of kinked demand curve