(Outline) Oligopoly

August 21, 2008 at 1:35 pm (ECONOMICS) ()

I. Introduction
A. An oligopoly market exists when barriers to entry result in a few mutually dependent companies controlling a
substantial portion of a market.
1. Products may be homogeneous or differentiated.
2. Examples include many industrial products such as steel and large consumer durables such as appliances.
3. Automobile, steel, and other oligopolistic industries lost monopoly power because of the foreign invasion
beginning in the 1970’s.
a. Eventually American companies became more competitive.
b. The price was lower real wages for manufacturing workers.
B Three well-defined pricing models exist
1. Kinked demand
2. Collusive pricing
3. Price leadership

II. Kinked demand
A. Describes a situation where a strong interdependency exists among firms within an industry
B. A firm’s demand curve tends to be elastic above equilibrium price as price increases are not followed by competitors.
If they do follow, industry supply has changed.
C. A firm’s demand curve tends to be inelastic below equilibrium price as price decreases must be followed by competing firms.
If competitors do not follow, a monopoly situation could be developing.
D. This interdependency of pricing is studied with game theory models where participants react to possible pricing situations
in a similar manner to the strategy of people playing chess or poker.
E. Kinked Demand from Amos Web has a more complete explanation.

III. Price leadership

A. One firm, usually dominant in size, sets price and others follow.

B. The automobile industry with General Motors as the price leader was an example until foreign competition

made the industry monopolistically competitive. Now the automobile industry is so competitive it is
approaching the purely competitive model.
C. Intel Corporation has tried with limited success to be a price leader in the computer chip industry.

IV. Restrictive vs. progressive oligopolies
A. Restrictive oligopolies
1. A few companies share a market creating a near monopoly situation.
2. Example: Rust Belt industries in the United States before foreign competition.
B. Progressive oligopolies
1. Technology lowers cost and improves product quality.
2. Companies must maintain technological base to survive.
3. Low consumer prices, high product quality, and monopoly profits exist simultaneously.
4. As long as new product development causes growth in consumer demand, funds are provided for R & D and
capital investment requirements.
5. Examples include computer software and high-tech consumer electronics.

V. Economic analysis of oligopoly
A. Restrictive oligopolies tend to be very monopolistic in nature with
1. P > MR = MC
2. Production is not at the lowest point indicated by the ATC curve.
3. Economic profits exist and quantity is restricted.
B. Progressive oligopolies have high economic profits in spite of price decreases brought on by high-tech efficiencies.

VI. Desoligopolization is the disappearance of an oligopoly. (Material from Wikipedia)

Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies:



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