Oligopoly: a situation in which a particular market is
controlled by a small group of firms.
• Homogeneous product oligopoly: intermediate goods
used by different industries to manufacture goods (eg
steel, aluminium).
• Differentiated product oligopoly: goods for personal
consumption. (eg computers, cars)
Example of an Oligopolistic Market
1. Few big firms dominate the market
2. Producers differentiated products as much as possible (though still
substitutes)
3. Barriers to entry and exit exist from complete to free
• non-price competition
• access to raw materials
• Licences (SA cell phone industry – gov only granted 3 licences)
4. Incomplete information
• Each firm tries to prevent other firms in the industry from getting knowledge
of its production processes, new products, R&D
5. Interdependence exists
• firms consider rivals’ reactions while adjusting prices and outputs.
6. Collusion
• Formal/informal agreement between firms to divide the market, set prices or
limit production. Act as a monopoly to restrict output.
7. Firms have a kinked demand curve – prices remain fairly stable
The
firm
faces
a ‘kinked
demand
The
principle
of price,
the
kinked
Assume
the
firm
is
charging
a follow
If
they
lower
rivalsdemand
will
curve’
forcing
stable
pricing
curve
rests
on
principle
that…
price
of
R5
andthe
producing
an
suit.
structure.
May be overcome by
output
of 100.
• •non-price
If a%firm
raises
price,
its rivals
change
Qits
<%
reduction
in P
competition.
will not
follow
suitR5 rivals
If they
charge
above
• inelastic demand curve
would not follow suit.
• If a firm lowers its price, its rivals
• revenue will decrease
all do
the same
• will
elastic
demand
(substitutes
available)
Price
R5
• revenue will decrease
New
Revenue
Original
Original Revenue
Revenue
Kinked D Curve
New Revenue
D = elastic
D = Inelastic
100
Quantity
MR & the Kinked demand Curve
8. Non-price competition
• Price wars uncommon as everyone loses out
Non-price competition includes…
a) Product differentiation
b) Product diversification/proliferation
Unilever own ALL of these brands!
c) Advertising
d) Packaging