REVISION OF OLIGOPOLY FOR CA FOUNDATION AND COMPETITIVE EXAM

• REVISION OF OLIGOPOLY FOR CA FOUNDATION AND COMPETITIVE EXAM
• MEANING

1. OLIGOPOLY IS A MARKET SITUATION WITH ONLY FEW SELLERS. THE WORD OLIGOPOLY IS DERIVED FROM TWO GREEK WORDS ’OLIGOI’ MEANS FEW AND POLLEN MEANS TO SELL
2. OLIGOPOLY IS THAT SITUATION IN WHICH FIRM BASES ITS MARKET POLICY IN PART ON THE EXPECTED BEHAVIOR OF FEW CLOSE RIVALS
3. FORM OF MARKET IMPERFECT COMPETITION WHERE ARE THERE FEW FIRMS IN THE MARKET,PRODUCING EITHER A HOMOGENEOUS PRODUCT OR PRODUCING PRODUCTS WHICH ARE CLOSE BUT NOT PERFECT SUBSTITUTE OF EACH OTHER
4. DIFFER FROM MONOPOLY WHERE THERE IS ONLY ON SELLER AND FROM PERFECT AND MONOPOLISTIC WHERE THERE ARE MANY COMPETITORS
5. REFERRED AS LIMITED COMPETITION,IMPERFECT MONOPOLY ,MULTIPLE MONOPOLY AND ALSO CALLED ALSO CALLED THEORY OF GAMES

• DEFINITION
• P.C. DOOLEY” AN OLIGOPOLY IS A MARKET ONLY A FEW SELLERS,OFFERING EITHER HOMOGENEOUS OR DIFFERENTIATED PRODUCTS. THERE ARE SO FEW SELLERS THAT THEY RECOGNIZE THEIR MUTUAL DEPENDENCE.
• MCCONNEL,” OLIGOPOLY IS A MARKET SITUATION IN WHICH NUMBER OF FIRMS IN AN INDUSTRY IS SO SMALL THAT EACH MUST RECONSIDER THE REACTIONS OF RIVALS IN FORMULATING ITS PRICE POLICY
• OLIGOPOLIST FACE A SITUATION IN WHICH THE OPTIMAL DECISIONS OF ONE FIRM DPENDS  ON WHAT OTHER FIRMS DECIDE TO DO IN WHICH THERE IS OPPORTUNITY FOR BOTH CONFLICT AND COOPERATION
• THE SPECIAL CASE OF A MARKET IS DOMINATED BY TWO FIRMS IS CALLED DUOPOLY
• FEATURES OF OLIGOPOLY

1. A FEW SELLERS:-SMALL NUMBER OF FIRMS VARY FROM 5 TO 10 DOMINATE THE INDUSTRY. RIVALRY AMONG FIRMS IS DIRECT AND ACTIVE FORM
2. PRODUCT MAY BE HOMOGENEOUS OR DIFFERENTIATED
3. LACK OF UNIFORMITY: SOME FIRMS MAY BE VERY LARGE AND OTHER MAY BE SMALL
4. ADVERTISEMENT:- STRATEGIC IMPORTANT
5. ELEMENT OF MONOPOLY:- FEW FIRMS AND PRODUCT DIFFERENTIATION CREATES BRAND LOYALTY ON THE PART OF THE CONSUMERS WHICH IS THE BASIC SOURCE OF MONOPOLY POWER
6. COMPETITION IS A UNIQUE TYPE IN THE OLIGOPOLISTIC MARKET. MEANS STRUGGLE OF RIVALS AGAINST RIVALS
7. INTERDEPENDENCE:_ THE CROSS ELASTICITY OF THE OLIGOPOLY PRODUCT IS HIGH. THEREFORE THE SELLERS ARE AWARE OF THEIR INTERDEPENDENCE WITH RIVALS, EACH FIRM IN THE INDUSTRY IS ASSUMED TO RECOGNIZE THE FACT THAT A CHANGE IN THE PRICE OR OUTPUT WILL CAUSE A REACTION BY THE COMPETING FIRMS
8. EXISTENCE OF THE PRICE RIGIDITY:STICK TO ITS OWN PRICE . IF FIRM TRIES TO RAISE THE PRICE,OTHER FIRMS WILL NOT DO SO, BUT IF REDUCE THE PRICE,OTHER WILL FOLLOW
9. UNCERTAINTY:- DUE TO INTERDEPENDENCE OF THE FIRMS ON EACH OTHER NO CERTAIN PREDICTION ABOUT THE BEHAVIOR OF THE FIRMS CAN BE MADE
10. EXISTENCE OF NON PROFIT MOTIVE: MAY NOT ALWAYS AIM TO MAXIMIZE THE PROFITS BUT HAVE OTHER MOTIVES LIKE SALES MAXIMIZATION,OUTPUT MAXIMIZATION ETC                           

•  CLASSIFICATION OF OLIGOPOLY
• ON THE BASIS OF PRODUCT DIFFERENTIATION:-

1. PERFECT OLIGOPOLY:-HOMOGENEOUS PRODUCTS
2. IMPERFECT OLIGOPOLY:-PRODUCTS ARE HETEROGENEOUS

• ON THE BASIS OF THE ENTRY:-

1. OPEN:-
2. CLOSED

• ON THE BASIS OF AGREEMENTS:

1. COLLUSIVE:-INSTEAD OF COMPETING FOLLOW A COMMON PRICE POLICY
2. NON COLLUSIVE:-FIRMS ACT INDEPENDENTLY. THEY COMPETE WITH EACH OTHER

• ON THE BASIS OF PRICE LEADERSHIP

1. PARTIAL: DOMINANT FIRM IS THE PRICE LEADER,FIXES THE PRICE POLICY AND OTHER FOLLOW
2. FULL OLIGOPOLY: WHERE NO FIRM IS DOMINANT ENOUGH TO ASSUME THE ROLE OF A PRICE LEADER

• DEGREE OF CO-ORDINATION;-

1. ORGANIZED OLIGOPOLY:-WHEN THE DIFFERENT FIRMS IN THE MARKET AVOID PRICE COMPETITION BY ORGANIZING THEMSELVES INTO A CENTRAL ASSOCIATIONS FOR FIXING PRICE,OUTPUT,QUOTA
2. SYNDICATED OLIGOPOLY:- ALL THE FIRMS IN THE MARKET CREATE A SYNDICATE OR CARTEL WHICH IS COMMON SELLING ORGANIZATION FOR THE SALE OF OUTPUT TURNED OUT BY ALL FIRMS

• REASONS

1. LARGE CAPITAL
2. PATENT RIGHT
3. OWNING OF SOME ESSENTIAL FACTORS
4. SUPERIOR ORGANIZATIONAL ABILITY
5. MERGERS

• PRICE AND OUTPUT UNDER OLIGOPLY INDETERMINATE

1. DUE TO INTERDEPENDENCE OF THE FIRMS
2. INCLUDE SEVERAL SPECIFIC MARKET SITUATIONS. DIFFICULT TO FRAME OUT INTEGRATED AND GENERALIZED THEORY
3. DEMAND CURVE IS DETERMINATE AND INDEFINITE
4. NOT POSSIBLE TO MAKE SUITABLE ASSUMPTIONS
5. BEHAVIOR IS NOT PREDICTABLE

·         TWO COMMON FEATURES OF THE OLIGOPOLY:-

1. PRICE TEND TO BE STICKY OR RIGID
2. IF PRICE CHANE,THEY CHANGE TOGETHER AND IT LEADS TO PRICE WAR

• KINKED DEMAND CURVE
• PRICE TEND TO REMAIN INFLEXIBLE FOR A VERY LONG TIME. EVEN IN THE FACE OF DECLINING COSTS,THEY TEND TO CHANGE INFREQUENTLY
• AMERICAN ECONOMISTS SWEEZY CAME UP WITH THE KINKED DEMAND CURVE
• DEMAND CURVE HAS A KINK AT THE LEVEL OF THE PREVAILING PRICE
• THE KINK EXIST BECAUSE OF TWO REASONS:-

1. THE SEGMENT ABOVE THE PREVAILING PRICE LEVEL IS HIGH ELASTIC
2. THE SEGMENT BELOW THE PREVAILING PRICE LEVEL IS INELASTIC

• PRICE RIGIDITY-SWEEZY’S KINKY DEMAND CURVE
• ASSUMPTIONS

1. IF ONE FIRM REDUCES ITS PRICE OTHER FIRM WILL ALSO REDUCE THEIR PRICE
2. IF ONE FIRM INCREASES ITS PRICE, OTHER FIRMS WILL ALSO REDUCE THEIR PRICES
3. THERE IS AN ESTABLISHED PREVAILING PRICE
4. THE MARGINAL COST CURVE WILL PASS THROUGH DOTTED PORTION OF THE MARGINAL REVENUE CURVE.

• EXPLANATION
• DIAGRAM  
•           
•                                                                                                                                
•                                                      
• PRICE RIGIDITY
• THE DEMAND SID EXPLANATION:- ANY CHANGE IN THE PRICE WILL BE THE WORST. A SUBSTANTIAL NUMBER OF FIRMS' CUSTOMERS WILL NOT PURCHASE IF ONE FIRM RAISES THE PRICE BUT IF IT REDUCE THE PRICE, OTHER FIRMS WILL ALSO REDUCE SO THE SALES OF THE FIRM WILL INCREASE VERY LITTLE.
• THE SUPPLY SIDE EXPLANATION :-THE BROKEN MARGINAL REVENUE SUGGEST WITH IN LIMITS SUBSTANTIAL CHANGES WILL HAVE NO EFFECT ON PRICE AND ANY CHANGE IN MARGINAL COST WILL ALSO NOT HAVE ANY EFFECT.
• CRITICISM
• DOES NOT EXPLAIN PRICE DETERMINATION
• WRONG ASSUMPTIONS
• IGNORES NON PRICE COMPETITION
• IGNORES COMPETITIVE REACTION
• PRICE AND OUTPUT DETERMINATION UNDER
  PERFECT COLLUSIVE OLIGOPOLY

• SAMUELSON ‘ COLLUSION DENOTES A SITUATION IN WHICH TWO OR MORE FIRMS JOINTLY SET THEIR PRICES OR OUTPUT,DIVIDE THE MARKET AMONG THEM
• ADVATAGE:

1. INCREASED PROFIT
2. BETTER OPPORTUNITY TO PREVENT ENTRY
3. DECREASED UNCERTAINTY

• COLLUSION IS OF  TWO TYPES: PERFECT AND IMPERFECT COLLUSION

• PRICE DETERMINATION UNDER PERFECT COLLUSION

·         A PERFECT COLLUSION IS THAT WHICH PRIMARILY CONSISTS OF CARTEL ARRANGEMENT. A CARTEL IS  GROUP OF FIRMS THAT GET TOGETHER AND MAKE JOINT PRICE AND OUTPUT DECISIONS.

·         ASSUMPTIONS:-

1. ALL THE FIRMS OF THE CARTEL ARE PRODUCING HOMOGENEOUS PRODUCT
2. THE MARKET DEMAND FOR THE PRODUCT IS THE CARTEL’S DEMAND
3. THE DEMAND AT EACH POSSIBLE PRICE IS KNOWN
4. THERE ARE THREE FIRMS A.B.C

• EXPLANATION
• DIAGRAM                                                  

• EXPLANATION
• EQUILIBRUM WILL BE WHERE ∑MC =MR AND EQUILIBRIUM OUTPUT WILL BE OQ WHICH IS EQUAL =OA+OB+OC. IT WILL RESULT IN MAXIMUM JOINT PROFIT
• PRICE LEADERSHIP MODEL
• IMPERFECT COLLUSION IS A SITUATION WHEN THERE IS NO OPEN OR SECRET AGREEMENT OR COLLUSION AMONG THE FIRMS OF AN OLIGOPOLISTIC INDUSTRY. THERE ARE VARIOUS FIRMS IN NON COOLUSIVE OLIGOPOLY BUT ONE OF THEM IS DOMINANT FIRM AND IS CALLED PRICE LEADER. IT SETS PRICE AND OTHER FIRMS FOLLOW IT.
• STRATEGY OF PRICE LEADERSHIP

1. WILL NOT CHANGE THE PRICE FREQUENTLY
2. COMMUNICATES THE FUTURE CHANGES IN PRICE TO THE WHOLE INDUSTRY
3. THE PRICE LEADER DOES NOT NECESSARILY CHOOSE THE PRICE WHICH MAXIMISES SHORT RUN PROFITS. TO DISCOURAGE THE NEW COMPETITORS THE PRICE MAY BE BELOW THE SHORT RUN PROFIT MAXIMISING LEVEL

• EXPLANATION
• DIAGRAM
• 
  

• EXPLANATION
• THE DOMINANT FIRM’S  EQUILIBRUM WILL BE WHERE MC =MR AND EQUILIBIRUM PRICE WILL BE OP AND TOTAL INDUSTY ‘S SUPPLY WILL BE OQ1 AND DOMINANT FIRM’S SHARE IS OQ AND SMALL FIRM WILL SUPPLY QQ1.
• OBJECTIVE TYPE QUESTIONS
• THE MAIN DIFFERENCE BETWEEN THE OLIGOPOLIST AND THAT OF MONOPOLISTIC COMPETITION IS THAT UNDER OLIGOPOLISTIC COMPETITION IS THAT UNDER OLIGGOPOLY

1. FEW SELLERS EACH WITH A SIZEABLE PORTION OF THE MARKET RIGHT ANSWER
2. NO COMPETIION THROUGH ADVERTISING
3. PRODUCT DIFFERENTIATION
4. FIRM WILL EARN SUPER NORMAL PROFIT
5. THE FIRMS CAN AIM AT PROFITS MAXIMISATION

• PURE OLIGOPOLY MEANS

1.      A FEW FIRMS PRODUCE A HOMOGENEOUS PRODUCT RIGHT ANSWER

2.     A FEW INDUSTRIES PRODUCE A HOMOGENEOUS PRODUCT

3.     A FEW FIRMS PRODUCE A HETEROGENEOUS PRODUCT

4.     A FEW FIRMS PRODUCE DIFFERENTIATED AND IDENTICAL PRODUCT

• IF AN OLIGOPOLIST INCURS LOSSES IN THE SHORT RUN,THEN IN THE LONG RUN

1. HE WILL GO OUT OF BUSINESS RIGHT ANSWER
2. HE WILL STAY IN THE BUSINESS
3. ANY OF THE ABOVE IS POSSIBLE

• IN AN OLIGOPOLY,A FIRM WHILE DECIDING ABOUT ITS PRICE AND OUTPUT POLICY HAS:

1. TO TAKE ACCOUNT OF THE LIKELY REACTION OF THE OTHER FIRMS RIGHT ANSWER
2. HAS NOT TO BOTHER ABOUT THE OTHER FIRMS
3. ASSUME THAT OTHER WILL NOT REACT
4. TO ACT INDEPENDENTLY OF THE OTHERS

• THE DOMINANT FIRM PRICE LEADER’S MARKET SHARE:-

1. IS LOWER,THE HIGHER THE FOLLOWER’S COST
2. IS HIGHEST,THE LOWER THE FOLLOWER’S COSTS
3. IS LOWER,THE LOWER THE FOLLOWER’S COST RIGHT ANSWER
4. IS INVARIANT WITH THE FOLLOWER’S COSTS

• A FIRM WITH THE HIGHEST COST OF PRODUCTION IS NOT PLAUSIBLE IN THE CASE OF

1. PRICE LEADERSHIP UNDER OLIGOPOLY RIGHT ANSWER
2. PRICE LEADERSHIP UNDER MONOPOLY
3. PRICE LEADERSHIP UNDER BILATERAL MONOPOLY
4. PRICE LEADERSHIP UNDER MONOPOLISTIC COMPETITION

• IN DIFFERENTIATED OLIGOPOLY,FIRMS ARE PRODUCING:

1. CLOSE SUBSTITUTE RIGHT ANSWER
2. SOME IDENTICAL GOODS
3. DIFFERENTIATED AND IDENTICAL GOODS
4. CLOSE SUBSTITUTE AND IDENTICAL GOODS

• THE OLIGOPOLISTIC INDUSTRIES ARE ALWAYS IN

1. PRODUCT COMPETITION
2. PRICE COMPETITION RIGHT ANSWER
3. COMPETING THROUGH ADVERTISEMENT
4. NO COMPETITION

• IN COLLUSIVE OLIGOPOLY FOR JOINT PROFIT MAXIMIZATION:-

1. THE HIGHEST COST FIRM MAKES THE HIGHEST PROFIT
2. THE LOWEST COST FIRM MAKES THE HIGHEST PROFIT
3. THE LOWEST COST FIRM PRODUCES  THE LARGEST OUTPUT RIGHT ANSWER
4. NONE OF THE ABOVE

• A KINKED DEMAND CURVE HAS :

1. A LOWER ELASTICITY ABOVE THE POINT OF KINK AND A HIGHER ELASTICITY BELOW
2. A HIGHER ELASTICITY ABOVE THE POINT OF KINK AND A LOWER ELASTICITY BELOW RIGHT ANSWER
3. A UNIFORM ELASTICITY BOTH ABOVE AND BELOW THE POINT OF KINK
4. NONE OF THE ABOVE

• THE KINKED DEMAND CURVE MODEL EXPLAINS THE

1. PRICE FLEXIBILITY
2. PRICE RIGIDITY
3. DEMAND FLEXIBILITY
4. DEMAND REIGIDITY