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OLIGOPOLY

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Jessica Frias

on 2 October 2014

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Transcript of OLIGOPOLY

OLIGOPOLY
a market structure in which only few sellers offer similar or identical products.
DIFFERENTIATED OLIGOPOLY

- the products produced by the various firms are identical.
Collusion
Perfect Collusion
THE OPEC OIL Cartel
Tax
OPEC Tax system
- requires the publication by every important OPEC nation of its level of taxes per barrel.
- safe price : price floor of taxes + cost
Some Problems Concerning Cartels
- OPEC countries formed a cartel to fix the price of oil
- Some country or countries must be willing to absorb the decline in sales; otherwise, price cheating will be encouraged and the cartel will break up.
- The Saudi government realizes that the burden of decreased sales from increased price would fall on them.
The Kinked Demand Curve
- traditional feature of oligopoly is the prevalence of rigid or "sticky" prices in industries.
- market characterized by monopoly is the most desirable for the producer.
Top Philippine Corporations
(as of 2013)
Source: SEC
Barriers to Entry
- One of the most important natural barriers to entry consists of the difficulty of putting up a large and complex plant.
The Welfare Effects of Oligopoly
- Oligopolistic market structures, as compared with purely competitive market structures, would be expected to have adverse effects on consumer welfare.
- Outputs are restricted and prices are increased above levels of costs, since product price tend to be higher than marginal costs. With entry partially or completely blocked, pure profits and additional restrictions occur.
Efficiency of the Firm
- The maximum potential economic efficiency for individual firms in the production of particular products is realized when those firms are induced to build most efficient sizes of plant and operate them at most efficient rates of output.
- Each oligopolist formulates his policies in relation to what his rivals might make
- We have several examples of oligopolies in our economy.
1. Oil Industry
2. Cement Industry
3. Car Industry
4. Beer Industry

Classification of Oligopoly Markets
PURE OLIGOPOLY
- this model is found in some of the capital goods industries, such as cement and oil industry.
– exists in industries where products are not homogeneous.
- This model is found in most manufactured consumer goods.
Collusion versus Independent Action

- a secret agreement between two or more persons or institutions to achieve certain objectives among the industry’s firm.

– an agreement among firms in a market about prices to charge and quantities to produce.
1. They can increase their profits if they can decrease the amount of competition among themselves and act monopolistically.
3. Collusion among the firms already in an industry will facilitate blocking newcomers from that industry.
3 Majors Incentives leading oligopolistic firms toward collusion:
2. Collusion can decrease oligopolistic uncertainty.
– or a formal organization of the producers within a given industry, is an example of perfect collusion among the sellers in an industry. (e.g. the Organization of Petroleum Exporting Countries or OPEC)
Cartel
Characteristics of Cartel
1. All producers or sellers in the industry are included in the agreement.
3. It covers both the price to be charged and the quantity of output to be produced by each agreeing seller, the output allocation being calculated as to minimize the aggregate cost of producing the total output of the industry.
2. The agreement is definite and enforceable on all parties to it.
4. It also includes a formula for distributing the profits of the combined operations among the agreeing parties
5. All parties adhere rigorously to the terms of agreement.
Imperfect Collusion
- made up mostly of tacit informal arrangements under which the firms of an industry seek to establish price and outputs.
- results from the failure to meet one or more of the characteristics of perfect collusion
1. Incompletely observed collusion.
2. Collusion with indefinite terms of agreement.
3. Collusion with incomplete participation of the sellers in the industry.
4. Interdependent action without agreement.
Graph of Imperfect Collusion
The Centralized Cartel
- is an example of collusion in its most complete form
- purpose is monopolistic maximization of industry profits by the few firms in the industry.
- distribution problems
Central association
- quotas to be produced
Purpose/Goal
- Monopolistic maximization of industry profits by the few firms in the industry.
- Profit maximization follows the monopoly model since a single agency is making the decisions for the industry. (OPEC)
- international cartel
- 1973 - cutback in oil exports
- 1973-1983 - series of very large increases in the price of crude oil
12 Major Oil Producing countries
- well publicized
- treated as a cost of production by any of the international companies
- increase in tax = increase in price
- OPEC cartel can push the crude oil price up toward monopoly level
*about $15 billion was transferred by this means in 1972
*in 1974 = $80 million

- Oligopolistic prices are normally “sticky” downwards, meaning firms in oligopoly normally do not lower their prices.
- If an oligopolist increases its price, it is likely to find its rivals will not change their prices.
The Profitability of Oligopolies
- Government regulations, patent rights are among the most important artificial to barriers to entry.
- A second artificial barrier to prospective entrants is the control by the firms already in the field of strategic sources of raw materials necessary for producing the product.
- Product differentiation may form an artificial barrier to entry.
Output Restriction
Range of Products
Differentiated Oligopoly
- provides each consumer with a broader range of products to choose.
- gradations in product qualities increase the divisibility of the consumer's purchases of particular items.
- opportunities for allocating income among different products may be so enhanced that the consumer can achieve a higher level of want satisfaction.
- enables a consumer to give vent to individual tastes and preferences with regard to alternative designs for a particular product.
- appears to work in the consumer's favor or to increase individual welfare.
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