Micro Economics

1. Pricing Under Oligopoly
Prepared by
Dr. K.V.Sasidhar

2. Pricing Under Oligopoly
• Oligopoly Meaning:
• Oligopoly has been derived from two Words
oligi and pollien.
• ‘Oligi’ means a ‘few’ and ‘Pollien’ means
‘sellers’.

3. Oligopoly
Definition
Oligopoly is defined as a market
situation in which there are a few
sellers or producers dealing in either
the homogeneous or differentiated
products.

4. Classification of Oligopoly
Oligopoly market can classified on following bases.
1) Nature of product:
on the basis of nature of products, Oligopoly is Classified as
Pure and differentiated oligopoly.
a) Pure oligopoly is one in case of which the product produced
by the competing firms in the market is identical or
homogeneous.
a) Differentiated oligopoly is supposed to exist in the market,
when the firms in the market produce and sell the non-homogeneous.

5. Classification of Oligopoly
2. Entry of firms: On the basis of freedom of entry
Oligopoly Market classified as ‘open’ and ‘Closed’
oligopoly.
a) Open oligopoly: when the new firms are allowed
to enter in to the market. It is called open
oligopoly.
b) Closed oligopoly: when the new firms are not
allowed to enter in to the market. It is called
open oligopoly.

6. Classification of Oligopoly
3. Price leadership:
Based on Price leadership the oligopoly can be
classified as ‘Partial’ and ‘Full’ oligopoly.
a) Partial oligopoly: when a large firm in the market
is recognized as price leader, the other smaller
firms in the market follow the price fixed by the
leader firm.
b) Full Oligopoly: Where there is no leading firm to
determine the price of a product in the market.
The firm may be engaged in price competition in
the case of full oligopoly.

7. Classification of Oligopoly
4) Agreement or Collusion:
The oligopoly market can be classified as ‘Collusive’ or
‘Non collusive’ on the basis of agreement or collusion
among firms in the market.
a) Collusive Oligopoly: When different firms in the
oligopoly market have some informal or formal
agreement about price, output, division of market,
profit sharing etc.
b) Non Collusive Oligopoly: When there is no
agreement or collusion among the firms.

8. Classification of Oligopoly
5) Degree of Co-ordination: On the basis of degree
of co-ordination the oligopoly market can be of the
types of ‘Organized’ and ‘Syndicated’ oligopoly.
a) Organized oligopoly: When the different firms
in the market avoid price competition by
organizing themselves into a central association
for fixing price, output quotas etc.
b) Syndicated oligopoly: All the firms in the market
crate a syndicate or cartel which is a common
selling organization for the sale of output
turned out by all firms.

9. Characteristics of Oligopoly
1. Few Sellers
2. Control over supply
3. Inter-dependence of firms
4. Conflicting attitudes of firms.
5. Lack of uniformity of size of firm
6. Group behavior
7. Advertising and selling costs
8. Price rigidity
9. Intense Competition
10.Indeterminateness of demand curve

10. Non- Collusive Oligopoly Models
1) Augustin Cournot’s Model
2) Bertrand’s Model
3) Edgeworth’s Model
4) Stackelberg,s Model

11. Augustin Cournot’s Model
Oligopoly was made by the French economist
Augustin Cournot in 1839. is model rests upon
the following main assumptions:
1. There are Two firms in the market, A and B
2. Each Firm owns the spring of mineral water
which is identical.
3. The cost of production is zero
4. Each firm is faced with a linear, negatively
sloping market demand curve.

12. Assumptions Continued…..
5. The productive capacity of each firm is unlimited.
6. Each firm considers itself to be independent in
determining its price or output. It means the mutual
interdependence is ignored.
7. Each firm assumes that the supply of rival firm will
remain unchanged.
Given the Set of assumptions, when ultimately long run
equilibrium determined, each firm will share the market
equally. Price will be zero because of zero cost of
production and the long run equilibrium under perfect
competition.
The model is explained through Fig.

15. Thank You