A Few Firms: Oligopoly is a market structure where there are only few firms, or a few large firms controlling a big size of its output.
2. Firms are mutually Dependent: The most important feature of oligopoly is that firms are mutually dependent in decision making which means that firms consider the market conditions carefully. The firms carefully consider the actions one firm and its effects on the competitor and how its competitors are likely to react. This makes the firms mutually dependent on each other for taking price and output decisions.
3. Barriers to the Entry of Firms: There are barriers to entry in an oligopoly market. The main reason for few numbers of firms in oligopoly is the barriers to the entry of firms, barriers can …show more content…
Non Price Competition: In oligopoly there are just a couple of firms, in the market. The firms in oligopoly do not lower the price because by doing so they may start a tussle of Price War among the rival firms and the firm who starts the price war may ultimately loose. To keep away from price war, the firm uses other ways of competition like: Customer Care, Advertising, Free Gifts etc. Such a competition is called non-price competition.
3.4 Price Determination under Oligopoly
3.4.1 Kinked Demand Curve Model Prof. Sweezy in his article published in 1939, presented the kinked demand curve analysis to explain price rigidities frequently observed in oligopolistic markets. Sweezy expects that if the oligopolistic firm brings down its price, its rivals will respond by matching that price cut in fear of losing their customers. Thus the firm which lowers its price will not be able to increase its demand. Therefore this portion of its demand curve is moderately inelastic.
On the contrary, if the oligopolistic firm rise its price, its competitors will not react and they will not change their prices. Consequently the quantity demanded of this firm will fall significantly. This portion of the demand curve will be relatively elastic. In both these situations, the demand curve of the oligopolistic firm has a kink at the existing market price which explains price rigidity.
Figure 3.1: Kinked Demand
2. Firms are mutually Dependent: The most important feature of oligopoly is that firms are mutually dependent in decision making which means that firms consider the market conditions carefully. The firms carefully consider the actions one firm and its effects on the competitor and how its competitors are likely to react. This makes the firms mutually dependent on each other for taking price and output decisions.
3. Barriers to the Entry of Firms: There are barriers to entry in an oligopoly market. The main reason for few numbers of firms in oligopoly is the barriers to the entry of firms, barriers can …show more content…
Non Price Competition: In oligopoly there are just a couple of firms, in the market. The firms in oligopoly do not lower the price because by doing so they may start a tussle of Price War among the rival firms and the firm who starts the price war may ultimately loose. To keep away from price war, the firm uses other ways of competition like: Customer Care, Advertising, Free Gifts etc. Such a competition is called non-price competition.
3.4 Price Determination under Oligopoly
3.4.1 Kinked Demand Curve Model Prof. Sweezy in his article published in 1939, presented the kinked demand curve analysis to explain price rigidities frequently observed in oligopolistic markets. Sweezy expects that if the oligopolistic firm brings down its price, its rivals will respond by matching that price cut in fear of losing their customers. Thus the firm which lowers its price will not be able to increase its demand. Therefore this portion of its demand curve is moderately inelastic.
On the contrary, if the oligopolistic firm rise its price, its competitors will not react and they will not change their prices. Consequently the quantity demanded of this firm will fall significantly. This portion of the demand curve will be relatively elastic. In both these situations, the demand curve of the oligopolistic firm has a kink at the existing market price which explains price rigidity.
Figure 3.1: Kinked Demand