Interdependency of Firms Is Key Feature of

Oligopoly & Monopolistic
Competition
Oligopoly literally means a few sellers
Each seller controls significant size of market
Product/ service could be (1) differentiated/ (2)
undifferentiated
Eg:(1) Cars, TVs, paints; (2) Oil, Cement,
Decisions of every seller in the market matters
Interdependency of firms is key feature of
oligopolistic industry
Some Examples of Oligopoly
Tata, Leyland, Volvo, etc. ------
Caterpillar, Komatsu, BEML, etc -----
Hero Honda, Bajaj, TVS, Kinetic etc. in ---
Maruti, Tata, HM, Hyundai, Fiat, Honda, etc in--
Asian Paints, J&N, Berger, Goodlas Nerolac etc-
MRF, Ceat, Modi, JK Tyre, Goodyear, Apollo, Goodyear
Kelvinator, Godrej, Voltas, Videocon, LG in ---
Castrol, Servo, HP, Gulf, Shell, Mobil, etc in ----
Oligopoly Examples. …contd.
Leela, Taj, Oberoi, Sheraton, Ramada, Hyat, Centaur
etc. in ------
Videocon, Onida, LG, Samsung, Philips, Akai, BPL, etc.
in ------
ACC, L&T, Nagarjuna, Ramco, Priya,
Pepsi, Coca Cola, Thumbs Up, etc. in ----
Bisleri, AuqaFina, Bailley, Ganga, etc in----
The Hindu, Indian Express, HT, ToI etc. in ---
Economic Times, Financial Exp., B.Std., etc in--
Main Features
It is in between the Monopoly and Monopolistic
market models
Every seller can exert significant influence on
market
Indeterminate demand curve; due to dependency
on rival’s reactions
Buyers keenly compare the price/ distinct features
of each seller’s product
Collusion and cartels
Collusion:
explicit or implicit agreement between existing
firms to avoid or limit competition with one
another
Cartel:
It is a situation in which formal agreements
between firms are legally permitted e.g. OPEC
Collusion is difficult if….
There are many firms in the industry
The product is not standardised
DD and cost conditions are changing rapidly
There are no barriers to entry
Firms have surplus capacity
The kinked demand curve (1)
Consider how a firm may

perceive its demand curve
Rs.
under oligopoly.
P0
It can observe the current
price and output.
but must try to anticipate

rival reactions to any
price change.
Q0 Quantity
The firm may expect rivals

to respond if it reduces
Rs.
its price, as this will be seen
as an aggressive move
P0
… so demand in response
to a price reduction is likely
to be relatively inelastic
D The demand curve will

be steep below P0.
Q0 Quantity
…but for a price increase

rivals are less likely to
Rs.
react,
P0 so demand may be
relatively elastic
above P0
so the firm perceives
that it faces a kinked
D demand curve.
Q0 Quantity
Given this perception, the

Rs. firm sees that revenue will
fall whether price is increased
P0 or decreased,
so the best strategy is to keep
price at P0.
Price will tend to be stable,

even in the face of an increase
D
in marginal cost.
Q0 Quantity
Game Theory: Some terms
Game: A situation in which intelligent decisions
are always interdependent
Strategy: Game plan describing how a player will
act or move in every conceivable situation
Dominant strategy: Here a player’s best strategy is
independent of those chosen by others
Select Cases of Pricing
If the product is undifferentiated, it becomes
indeterminate to guess/ predict price, as it depends on
rivals’ reaction. But, it will be lesser than under
monopoly.
With product differentiation, each seller can have some
flexibility in varying price/ output
Normally, if there is a sudden rise in DD for one seller,
he hesitates to raise price, since others will ignore it.
Likewise, if costs of one seller go down, he may not
reduce price at once, as others may reduce more

Kinky Demand Curve
Introduced by Paul Sweezy, it deals with why prices of
products like steel at $28 per ton during 1901-16; again at
$43 between 1922-33; Sulphur prices remained at $18 per
ton between 1926-38 excepting 2-3 cents variation/ ton
in two years.
Hints to draw Kinky DD Curve
AR has a kink at the prevailing price
MR becomes discontinuous below the kink
If MC passes through the Gap, holding price-output
constant is the best alternative
New industry, in early stages, this model is useful in
shorter term.
Price Leadership
Dominant Firm
Intel’s 386 cut chips price from $152 to $99 in 1992 (till
1991, it was monopoly), AMD had to follow it
Barometric Price Leadership
Old, experienced & largest firm assumes the role of a leader;
protects the interests of other sellers. Others’ costs of
production is considered before fixing price
Exploitative/ aggressive pr. Leadership
Largest firm acts as an aggressive leader, and compels other
firms to fix the same price as it fixes. Other firms must follow
its price irrespective of cost conditions
Collusive Oligopoly
The small number of firms can arrive at tacit or
formal agreement about price/ output.
Formal agreement is termed as a cartel
Though some minor rivalry/ self interest still
persists, under the cartel, group interest is given
prime importance. In case of a conflict of interests
between the two, self interest is ignored.
OPEC Cartel
Members of major oil producers (13, incl. Iraq)
formed in 1960)
In 1975, OPEC accounted for 55% of world oil output
& 80% trade; now produces 30% of world output
Determination of oil price (meets at Vienna twice a
year normally), own & control oil resources directly
Saudi Arabia is major player in the cartel
They are now operating in a $22-28 per barrel price
band, and vary output accordingly.
Venezuela strike pushes up price/ US-Iraq conflict
affects the price (Jan/ 03)
Effects of Oligopoly
Possibility of restricted output/ high prices
Entry barriers make consumers pay higher price
Firms will not be able to build/ operate at optimum
levels of production
Sales promotional strategies waste resources
Neither liked by the players/ nor good for
consumers/ government as less tax collection.
Lower employment opportunities
Monopolistic Competition
It is a market which has many sellers producing
goods which are close substitutes
Products are similar but not identical.
This means there is product differentiation-real
( physical) or perceived
Collusion is unlikely as all players have limited
control over market supply and price
This market can be treated as a set of various
monopolists competing with one another.
Entry is difficult; but not restricted
Some Examples
Nearly 40-50 brands of toilet soaps in India
About 20 Tooth pastes
Number of convent schools in a city
Organised textile industry
Private Travel services (60-70) between two cities
Manufacturers of pesticides
Domestic publishers (25-30) for leading subjects of
college texts/ guides/ note books
Price-Output Determination
Short run:For a typical firm
Same as the monopoly equilibrium for profits/ losses
(MC=MR, MC cuts MR from below)
There is scope for making supernormal profits in
short run
In long run, the firms will be earning just normal
profits, as some more firms can enter and output
increases
In long run, AR/MR are downward sloping and AR is
tangential to AC.
Group Equilibrium
An assumption made here is that there is uniformity
in costs and demand faced by various firms within a
group.
Individual firm’s decisions are negligible; no
retaliation by others
If a firm within a group develops a good that
becomes popular, it enjoys huge profits in short run.
Later, these are competed away and only normal
profits result
Effects of Monopolistic
Competition
Slightly lesser output than in perfect competition and
higher price
Better variety exists here than in PC
Huge selling costs, low benefit to consumer
Weak/ inefficient firms are allowed to operate
Transportation costs (each firm wishes to cater to
consumers spread across the country)
It does not promote specialisation for firms
It does not encourage standardization; hence low capacity
utilisation by all firms
Summary
Oligopoly and Monopolistic models are closer to
reality
Both are not extreme models like Monopoly and PC
While entry is very difficult (but not impossible) in
oligopoly, it is relatively easier in monopolistic
competition.
Efficiency is better in oligopoly than under
monopolistic competition.

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Oligopoly & Monopolistic

Consider how a firm may

but must try to anticipate

The firm may expect rivals

D The demand curve will

…but for a price increase

Given this perception, the

Price will tend to be stable,

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