NAME: MAAHIR VOHRA
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
In real world, prices do change
Firms may not seek to maximise profits, but prefer to increase market share Some firms may have very strong brand loyalty and be able to increase price without demand being very price elastic.
Firms in oligopoly may still be very competitive on price, especially if they are seeking to increase market share.
Features of Perfect Competition
1. Many firms.
2. Freedom of Entry and Exit; this will require low sunk costs. 3. All firms produce an identical or homogenous product.
4. All firms are price takers, Therefore firm’s demand curve is perfectly elastic 5. There is perfect information and knowledge.
Diagram for Perfect Competition
These factors are unrealistic in the real world. However Perfect Competition is as important economic model to compare other models. It is often argued that competitive markets have many benefits which stem from this theoretical model. · In the Industry price is determined by the interaction of Supply and Demand · The firm will maximise output where MR = MC at Q1
· In the Long Run Firms will make Normal profits.
If Supernormal profits are made new firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will leave the industry causing price to rise Changes in Long Run Equilibrium
1. The Effect of an Increase in Demand for the Industry.
If there is an increase in demand there will be an increase in price Therefore the Demand curve and hence AR will shift upwards. This will cause firms to make supernormal profits. This will attract new firms into the market causing price to fall back to the equilibrium of Pe 2. An increase in firms costs
The AC curve will increase therefore AR< AC
Firms will now start making a loss and therefore firms will go out of business. This will cause supply to fall causing prices to increase. Efficiency of Perfect...
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