oli group_upload.ppt
-
Upload
priya-darshini -
Category
Documents
-
view
256 -
download
0
Transcript of oli group_upload.ppt
GROUP 3 : OLIGOPOLY
STRATEGIC MANAGEMENT GSM 5160
The Term “Oligopoly” has been derived from two Greek words.
‘Oligi’ which means few and
‘Polien’ means sellers.
OLIGOPOLY
A market structure in which a few large firms dominate a market
Pure oligopolySelling homogenous products Eg: aluminums, sugar
Differentiated oligopoly
Selling differentiated productsEg: automobiles, TV set, soft drinks
Collusive oligopoly
Firms functioning on the basis of an agreement between themEg: Oil and Petroleum Exporting Countries (OPEC)
Non - collusive Oligopoly
no any kind of agreements and conducts between the firms Eg: Automobile industry
TYPES
SOURCES
Factors that give rise to oligopoly are : Huge capital investment Economies of scale. Patent rights Control over certain raw materials Merger and takeover.
CHARACTERISTICS
NUMBER OF FIRMS: FEW
VARIETY OF GOODS: SOME
BARRIERS TO ENTRY: HIGH
CONTROL OVER PRICES: SOMESome contro
l
Small number of firms offering similar product or service
Sensitive to changes and actions by firms. For example, a move on changing price or introducing new models, will evoke a countermove from its rival.
Rivals will match any price cuts and not follow their price rise. Firms view their demands as inelastic for price cuts, and elastic for price rise.
If one firm changes the price, demand for its product depend on the reaction of its rival for the change in price.
DEMAND
KINKED DEMAND CURVES
PRICE Price war- a series of competitive price cuts that
lowers the market price below the cost of production
Price fixing- an agreement among firms to charge one price for the same good
Collusion/cartel- an agreement among firms to divide the market, set prices, or limit production
WHAT IS COLLUSION?
• Called cartel
– Illegal in US & Europe
• Factors affecting successful collusion:
– Number & size distribution of sellers
– Product Heterogeneity
– Cost Structure
– Size & Frequency of Orders
– Threat of retaliation
Game Theory ?
Game theory helps us understand oligopoly and other situations where “players” interact and behave strategically.
Dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players
Prisoners’ dilemma: a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial
PRISONERS’ DILEMMA
The police have caught Bonnie and Clyde, two suspected bank robbers, but only have enough evidence to imprison each for 1 year.
The police question each in separate rooms, offer each the following deal: If you confess and implicate your partner,
you go free. If you do not confess but your partner
implicates you, you get 20 years in prison. If you both confess, each gets 8 years in
prison.
Confess Remain silent
Confess
Remain silent
Bonnie’s decision
Clyde’s decision
Bonnie gets
8 yearsClyde gets 8 years
Bonnie gets
20 years
Bonnie gets
1 year
Bonnie goes free
Clyde goes free
Clyde gets 1 year
Clyde gets 20 years
Confessing is the dominant strategy for both players.
Nash equilibrium: both confess
• Outcome: Bonnie and Clyde both confess, each gets 8 years in prison.
• Both would have been better off if both remained silent.
• But even if Bonnie and Clyde had agreed before being caught to remain silent, the logic of self-interest takes over and leads them to confess.
CONCLUSION
Oligopolies can end up looking like monopolies or like competitive markets, depending on the number of firms and how cooperative they are.
The prisoners’ dilemma shows how difficult it is for firms to maintain cooperation, even when doing so is in their best interest.
Policymakers use the antitrust laws to regulate oligopolists’ behavior. The proper scope of these laws is the subject of ongoing controversy.