SEMESTER 4 B.A (Honors) Economics - PowerPoint Presentation

1. SEMESTER 4B.A (Honors) Economics Course Code: ECNHC401Course Title: Advanced Microeconomics Unit: 3OligopolyPrepared byAnindita ChakravartyAsst. Prof. ( Dept of Economics)

2. Meaning of Oligopoly Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products. Oligopoly market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market and have control over the price of the product. With only a few firms in the market, the action of one firm is likely to affect the others.

3. Firms producing homogeneous product is called pure or perfect oligopoly found primarily among industrial products such as aluminium, copper, steel, etc. Whereas, imperfect oligopoly are firms producing differentiated products found among producers of consumer goods such as soaps, automobiles, detergents, refrigerators, etc.

4. Characteristics of Oligopoly After knowing the meaning of oligopoly, let us now discuss the features of the oligopoly market structure.Few Sellers: Under the oligopoly market structure, the sellers are few, and the buyers are many. Few firms dominating the market enjoy a significant control over the price of the concerned product. With a few players in the market, there is intense competition among the sellers. Any decision taken by one firm will have a considerable impact on its rivals. Thus, each firm keeps an eye on the promotional activities of the other

5. Interdependence: In an oligopoly market, the seller has to be very much cautious regarding action taken by the competing firms. Since there are few sellers in the market, if any firm takes decision to change the price or any other promotional scheme, all other firms in the industry have to comply with it, to remain in the competition. Thus, every firm remains alert to the actions of others and plans their strategy beforehand. Hence, there is a complete interdependence among the sellers with respect to their price-output policies and decisions.

6. Advertising: Under Oligopoly market, every firm advertises their products on a frequent basis, with the intention to attract more and more customers and increase their good name and customer base. This is due to the advertising that makes the competition intense among the firms with the improvement in quality of the products. Thus, in order to be in the race, each firm makes huge expenditure on advertisement activities and product promotion.

7. Entry and Exit BarriersThe firms under oligopoly market can easily exit the industry whenever it wants, but has to face certain barriers while entering into it. These barriers could be Government license, patent, economies of scale enjoyed by large firms, high capital requirement, complex technology, etc. Again, sometimes, the government regulations act as a barrier for the new entrants for being more favorable to the existing large firms.

8. Let us understand a special case of the theory of oligopoly in which there are only two sellers. Such limited case of oligopoly is termed as duopoly where both the sellers are completely independent and no agreement exists between them. Two important feature of duopoly model is that firstly, there are strong barriers to entry in the market, e.g. brand loyalty (Coca-cola and Pepsi) and secondly there exists significant economies of scale which suit a small number of firms. Two formal models of Duopoly are:Cournot ModelBertrand ModelWe will discuss them in detail in the coming classes.

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