The demand curve under oligopoly is indeterminate because any step taken by his rivals may change the demand curve. Most firms do not possess the expertise to calculate cost and demand conditions of the industry. It may be shortened even under conditions of fall in demand or costs thereby making price unstable. When a cartel raises the price of the product and increases the profits of its members, it creates an incentive for new firms to enter the industry. Empirical evidences about the working of modern oligopolistic firms reveal that there are a variety of marketing channels that help in increasing the sales of a product as against its rivals. Changes in Costs: In oligopoly under the kinked demand curve analysis changes in costs within a certain range do not affect the prevailing price.
This result is depicted by the relative elastic demand curve, dd. There are often deviations from posted prices because of trade-ins, allowance and secret price concessions. Collusive oligopoly is a situation in which firms in a particular industry decide to join together as a single unit for the purpose of maximising their joint profits and to negotiate among themselves so as to share the market. So they leave their estimation to one leader firm which has the ability to do so. In some countries this kind of collusive agreement is illegal e. Attaining the leadership status, the dominant firm estimates its own demand curve and fixes a price which maximizes its own profits. However, in actuality, there are more than two firms in an oligopolistic industry which do not share the market equally.
If both companies would only keep prices high, they will jointly maximise profits. Collusive Oligopoly : Collusive oligopoly is a situation in which firms in a particular industry decide to join together as a single unit for the purpose of maximising their joint profits and to negotiate among themselves so as to share the market. Cartel, Collusion, Competition 1075 Words 3 Pages 2. However, the Schumpeterian hypothesis states that there is high tendency of innovation and technological advancement in oligopolistic industries. They are interdependent, this is because the industry is made up of small firms and a change in one of those firms may cause a great impact on the other, this causes a price rigidity because the price in the industry tend to change much less than in more competitive markets. The market industry demand curve for the product is known to both the firms.
But under price leadership one firm sets the price and others follow it. A further barrier to entry is provided by limit pricing, whereby, existing firms charge a price low enough to discourage entry into the industry. Besides these problems in the working of a cartel, it is more difficult to form and run a cartel for long in the case of a differentiated product than in the case of a homogeneous product. Thus at price P 1 the small firms supply the whole of the quantity of the product demanded at that price. The seller does not worry about how other sellers will react, because either the seller is negligibly small, or already a monopoly. This is due to the very high barriers to entry.
This is because the oligopolist avoids experimenting with price changes. This shows that each brand is highly differentiated in the minds of the consumers. It is often noticed that there is stability in price under oligopoly. An example of an oligopolistic market structure is commercial banking and the newspaper industry. Let us try to understand how the output allocation of member firms takes place in order to minimize the total cost. The different models are discussed here in the following pages.
They have short-term and long-term advantages and disadvantages. Total cost will be minimised when the various firms in the cartel produce such separate outputs so that their marginal costs are equal. Firms by experience may realize that independent pricing creates uncertainty and insecurity among rivals. Monopolistic competition normally exists when the market has many sellers selling differentiated products, for example, retail trade, whereas oligopoly is said to be a stable form of a market where a few sellers operate in the market and each firm has a certain amount of share of the market and the firms recognize their dependence on each other. Barometric price leadership has been seen in the automobile sector. This type of cartel is inherently unstable because if one low-cost firm cheats the other firms by charging a lower price than the common price, it will attract the customers of other member firms and earn larger profits. It compares the relative sizes of firms, the amount of sellers vendors and the barriers of entry to the market.
It emphasizes the danger of an overestimated output gap that could lead to stubborn inflation due to loose monetary policy following the 2008 recession. Abraham Maslow, Alcoholism, Family 1030 Words 3 Pages definitions of perfect competition and pure monopoly lie oligopolies and monopolistic competition, oligopoly is where there are a few sellers with similar or identical products , which are large enough relative to the total market that they can influence the market price. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. Cartels do exist in some implicit or explicit forms in different parts of the world. Price Determination under Oligopoly Oligopoly is that market situation in which the number of firms is small but each firm in the industry takes into consideration the reaction of the rival firms in the formulation of price policy. The price leader may not be able to fix a higher price out of fear of new entrants. Equilibrium under Collusion : The modern economists are of the view that independent price determination cannot exist for long in oligopoly.
Hence whenever any firm makes any decision regarding price etc, it has to take into account the behavioural response of the other. However, when costs of member-firms are different, the different quotas for various firms will be fixed and therefore their market shares will differ. A situation in which a particular market. But the general belief among economists is that independent pricing cannot last long and it is bound to lead to either price leadership by leading firm or some type of collusion between the rival firms. We may conclude that perfect collusive oligopoly pricing has not any set pattern of price behaviour.
An oligopolistic firm tries to differentiate its product from that of its rivals in order to raise the demand for its product and to make its demand curve less elastic. Thus the theory is not applicable in the long-run. Discuss the factors that make collusion likely to succeed. Thus under perfect cartel type of collusive oligopoly, the price and output determination of the whole industry as well as of each member firm is determined by the common administrative authority so as to achieve maximum joint profits for the member firms. Each seller knows that the other seller or sellers will react to its changes in prices and also quantities. From what has been said, it is clear that the distinguishing characteristic ofoligopoly is the interdependence or rivalry among firms in the industry. In perfect competition no single firm can affect price or quantity this is due to intense competition and the relative small size of.