This takes some of the risk out of pricing decisions, given that all firms will abide by the rule. When oligopolists follow each others pricing decisions, consumer demand for each oligopolist's product will become less elastic or less sensitive to changes in price because each oligopolist is matching the price changes of its competitors. However, it is worth mentioning that from the kinked demand curve oligopoly theory it does not follow that the price always remains the same whenever the costs and demand conditions undergo a change. Joint profits are generally more than the total profits earned by them if they were to act independently. Another key feature of oligopolistic markets is that firms may attempt to collude, rather than compete. Non-price competition can be in terms of product differentiation, advertising, and other tools used by organizations to promote their sales. On the other hand, if the oligopolistic firm increases its price, its rivals will not follow it and change their prices.
For, it is not possible to rationalise and sort out the differences in the qualities of the product. Also, competitive pressures encourage them to innovate. Ignores non-price competition among organizations. The price of the product determines the policy of the cartel. The Model : Given these assumptions, both firms enter into a tacit agreement whereby the high-cost firm В will follow the price set by the price leader firm A and to share the market equally.
Neither Pepsi nor Coke will be inclined to raise their price since it would cause loss of sales and market share to the rival. Gaining market share occurs when a company stays one-step ahead of the competition by knowing what the consumer wants. Analysis of the Kinked Demand Curve Model : In the oligopoly model under discussion, the properties of the kinked demand curve as well as its significance are especially discussed. An example of cost absorption in practice is when the price of crude oil rises and petrol companies wish to increase price, but do not as no company wants to be the first to do so. This would result in producing the kinked demand curve. Predatory acquisition Predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out.
The approaches are grouped under three broad headings: Dominant Schools; Rival Approaches and New Departures. The possibility of collusive behavior is captured in the alternative theory known as the cartel theory of oligopoly. When competing, oligopolists prefer non-price competition in order to avoid price wars. Sweezy on the one hand and Profs. 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. In fact each will gain in sales to the extent of a proportionate share in the increase in total demand. The total profits are distributed in proportion as decided among member organizations.
The market demand curve for the product is given and known to the cartel. Suppose there is a constant threat of entry into the oligopolistic industry. Obviously it cannot be both. Princeton: Princeton University Press, 2004. Chief Executive Indra Nooyi has said the company — which also owns the Frito-Lay, Tropicana, Gatorade and Quaker brands — aims to slow the decline of U.
Price Determination under Oligopoly: We shall confine our study to the non-collusive oligopoly model of Sweezy, and to the collusive oligopoly models relating to cartels and price leadership. In short, changing price is too risky to undertake. Finally, even in the case of pure oligopoly i. Games theory involves the study of optimal strategies to maximise payoffs, taking into account the risks involved in estimating reactions of opponents, and also the conditions under which there is a unique solution, such that an optimum strategy for two opponents is feasible and not inconsistent. Market-Sharing Cartel : Another type of perfect collusion in an oligopolistic market is found in practice which relates to market-sharing by the member firms of a cartel.
This is because if the organization would increase the prices, the rival organizations would decrease their prices and gain the market share. Consequently, price variations among firms become more common. As the result of price cuts by both Pepsi and Coke, there will be an increase in sales by both — at least partially at the expense of smaller competitors. Dieses Kapitel enthält in der Hauptsache Analysen der wichtigsten Marktformen, mit denen die Ergebnisse des 3. There have been numerous examples of price wars in recent years with the most notable battles occurring on the petrol forecourts and in the retail grocery and travel businesses. But ultimately, they agree upon a common price below which they will not sell. The firms forming a cartel gain at the expense of customers who are charged a high price for the product.
They relate both to pure and differentiated oligopoly. Historically speaking, however, this usage is somewhat confusing, since recontracting is originally due to Edgeworth who developed it in a direction different from that in which Walras developed his tâtonnement Walker 1973. This is because as a result of the rise in his price, his customers will withdraw from him and will go to his competitors who will welcome the new customers and will gain in sales. The Kinked Demand Curve Analysis Diagram Analysis diagram of the kinked demand curve Is there a stable profit maximising equilibrium in this model? 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. This will force the cartel to break down. Thus price stability becomes illusory. Ownership or control of a key scarce resource Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport.
Thus its marginal revenue curve coincides with the horizontal demand curve. An Economist Among Mandarins: A biography of Robert Hall 1901-1988. Strategy Strategy is extremely important to firms that are interdependent. Assumptions of the Kinked Demand Curve Model : This model was developed independently by Prof. If they enter into a common price agreement, it would be in the interest of the high-cost firm to sell more quantity at a lower price set by the price leader by earning a little less than the maximum profits. The Sweezy Model of Kinked Demand Curve Rigid Prices : In his article published in 1939, Prof. The resultant price and output will depend upon the reaction of the collusive oligopolists towards the profit maximisation price and their attitude towards the existing and potential rivals.
In this part, it is covered that how does price changes affect in oligopoly market competition, also with pricing strategies in oligopoly market. For example, it may be accepted that a particular firm is the price leader in an industry, and other firms simply follow the lead of this firm. These expectations rest on the normal situation of substantial excess production capacity available in the industry. This is because when under oligopoly products are differentiated, it is unlikely that when a firm raises its price, all customers would leave it because some customers are intimately attached to it due to product differentiation. Whatever price changes take place, the leader announces from time to time, and the other firms follow him. Even if the entry of new firms is blocked, it is only a short-run phenomenon because the success of the cartel will lead to the entry of firms in the long run. Please place the order on the website to order your own originally done case solution.