Slide 1

OLIGOPOLY&GAME THEORY

Presented by Group 2:Zuha HandooSuhail QadirFoziya KhandayMariya Qurat-Ul-AinAqib HussainMujeeb TariqSalman Farooq Dar

INTRODUCTION

TYPES OF MARKET STRUCTURE: In decreasing order of level of competition

Oligopoly :

Derived from the Greek word, oligo(few) polo(to sell).Market dominated by a few large firms, i.e.; Competition amongst the few.

Characteristics of Oligopoly:Only few sellers.Homogeneous/Differentiated products.Imperfect knowledge.High barriers to entry.Mutual dependence.Non price competition.

Types of Oligopoly:Pure or Perfect OligopolyImperfect or Differentiated OligopolyCollusive OligopolyNon-Collusive OligopolyOpen OligopolyClosed Oligopoly

Pure or Perfect Oligopoly: If the firms produce homogeneous products, then it is called pure or perfect oligopoly. Though, it is rare to find pure oligopoly situation, yet, cement, steel, aluminum and chemicals producing industries approach pure oligopoly.

2. Imperfect or Differentiated Oligopoly:If the firms produce differentiated products, then it is called differentiated or imperfect oligopoly.For example, passenger cars, cigarettes or soft drinks. The goods produced by different firms have their own distinguishing characteristics, yet all of them are close substitutes of each other.

3. Collusive Oligopoly: If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly.In other words, the firms in a collusive oligopoly combines to avoid the competition among themselves regarding the price and output of the industry. For example, OPEC(Organization for petroleum exporting countries) serves the example for collusive oligopolies.

4. Non-collusive Oligopoly: If firms in an oligopoly market compete with each other, it is called a non-collusive or non-cooperative oligopoly.The firms in non-collusive oligopoly tries to gain maximum share of the market by developing policies and strategies to outperform or beat their rivals.

5.Open oligopoly: An open oligopoly provides full freedom to new firms to enter into industry.In the situation of open oligopoly there is no restriction of any kind for the desiring firm to enter into the market.

6.Closed oligopoly: A closed oligopoly refers to that market structure where only few firms control the market and new firms are not allowed to enter industry. Barriers are set to prevent the entry of new firms into the industry. For example, patents,licences,requirement of large capital,control over crucial raw materials are some of the reasons which prevent new firms from entering into industry.

Barriers to entry:

Access to suppliers & distributorsCost of entering a marketLegal requirementsLegal restrictionFear of retaliation

Examples of oligopoly:

Smart Phone Operating Systems: The smart phone market is similarly dominated by a handful of companies, the most powerful two being Google Android and Apple IOS. Those companies have deep relationships with the handset providers and are able to have their system pre installed on each phone.

2.Computer Operating Systems: New high tech markets can become oligopolies when the companies provide unique products that are supported by an ecosystem of supporting technology. Computer operating systems are dominated by Microsofts Windows, Apples Mac OS and the open source Linux operating systems. These three systems capture close to 100 % of the computer operating system market due to their established positions. According to the StatOwl website.

3.Music Industry: The music entertainment industry is dominated by four music companies that control 80% of the market and these are universal Music Group, Sony Music entertainment, Warner Music Group.

4.Auto industry: Auto industry is another example of an oligopoly, which is dominated by few firms and these firms are Hero Motor Corp., TVS and Honda.HERO: 40% Market Share Honda: 25% Market ShareTVS: 14% Market Share

5.Oligopoly in soft drink industry:Two firms control 74 % of soft drink sales:42.8% coca-colas 25 brands and 139 varieties.31.1% Pepsis 18 brands and 163 varieties. Coca-cola and Pepsi are in an oligopoly market. They are mutually and strategically interdependent, as a decision made by one firm invariably affects the other. They are selling the homogeneous product so they can control over price.

Some other common examples:AirlinesSupermarketsSteel IndustryHealth Insurance, etc

Models of oligopoly:

Although there are many models which explain oligopolistic market structure, but we will be discussing two over here. These are:1: Kinked model2: Price Leadership model

Kinked Model: A bend in a standard demand curve that is a result of competitors decreasing their prices to match each others, but not raising them to achieve the same effect. The thought is that once a business has reduced their price to a certain level any fluctuation that raises the price will cause the firm to lose customers.

Price Leadership model:Firms follow the price leadership of a particular firm.Tacit collusion i.e. unwritten and unspoken agreement.

Types of Price Leadership Model:

Price leadership by Low-Cost Firm.Price leadership by Dominant Firm.The Barometric price leadership.

AssumptionsSmall number of firms.Entry is restricted.Homogeneous product.Interdependence.Firms have similar cost curves.

Low-Cost Price LeadershipFirm with the lowest cost of production sets the price and others follow.Only the leader firm optimizes the profit.

Price Leadership by Dominant FirmDominant firm sets the priceInfluence of dominant firm on market is very high.Prices set by the dominant firm maybe pushed.

Barometric Price LeadershipPrice is generally set by a large and experienced firm with good knowledge and proven predictability.Leader consistently monitors the market. Leader considers common interest of all firms.Forms due to the dissatisfaction of firms with the level of competition.

Thank You!