If a firm changes its output level or price of the product, it will influence the other firm operating in the same market. It is possible that a lower price is chosen deliberately to limit entry and maximize long run profits. This means that the marginal revenue will be less below p, and higher above. Some of the ways include price, advertising, product quality, etc. Thus it follows from the kinked demand curve theory that price is not likely to remain stable in the event of rise in cost. They are discussed as under: a Non-Price Competition Cartel: The non-price competition agreement among oligopolistic firms is a loose form of cartel. The Cournot solution obtains when both firms choose to be followers.
On this assumption, it is a simple matter to calculate the monopoly price in the industry as shown in Fig. Hence sales will be less than desired. Assumptions : The analysis of joint profit maximisation cartel is based on the following assumptions: 1. The upper segment of the demand curve is relatively elastic and the lower segment is relatively inelastic. It will fix the price suitable to all the firms.
In still other cases, the price at which the good must be sold is set. Fear of govt interference Fear of entry Lack of freedom in innovation. This result is depicted by the relative elastic demand curve, dd. Exploration of Complex Dynamics for Cournot Oligopoly Game with Differentiated Products. West African trade: A study of competition, oligopoly and monopoly in a changing economy. It is clear from the above that determination of price and output level in Oligopoly is difficult due to interdependence of the firms.
Looking at the uses of advertising in oligopoly, professor Baumol stated that oligopoly is the only condition where advertisement comes into its own, and one can understand the true power of advertising. Furthermore, since price competition can lead to ruinous price wars,oligopolists usually prefer to compete on the basis of product differentiation,advertising, and service. The state may do so if it seeks to protect the sellers—farmers for instance. Firms may choose easy to remember numbers like £9. The firms can compete with one another on a non-price basis by varying the colour, design, shape, packing, etc.
As a result of operating in countries with enforced competition laws, the Oligopolists will operate under tacit collusion, which is collusion through an understanding that if all the competitors in the market raise their prices, then collectively all the competitors can achieve economic profits close to a monopolist, without evidence of breaching government market regulations. Firms within an oligopoly produce branded products and there are also barriers to entry. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. For in an inflationary period when demand increases, the oligopolistic firm will raise price and other firms will also follow it. Large firms want a lower price, a higher output quota and larger profits. Cartel board fixes the output quota of each member firm. Thus neither the increase nor the reduction in the price will benefit the firms under this situation.
There is a tacit agreement among the firms to sell the product at a price set by the leader of the industry i. Non-Price Competition in Oligopoly 1. A fascinating example of tit-for-tat in action occurred during the trench warfare of the First World War. Although the firms are rivals, they are mutually interdependent. This price is accepted by every firm and no one is willing to change it.
This difference in elasticities is due to the particular competitive reaction pattern assumed by the kinked demand curve hypothesis. There are only two firms that enter into market-sharing agreement on the basis of the quota system. Buyers have only imperfect knowledge as to price, cost and product quality. For example, there are now only a small number of manufacturers of civil passenger aircraft, though Brazil and Canada have participated in the small passenger aircraft market sector. The market industry demand curve for the product is known to both the firms.
Thus its marginal revenue curve coincides with the horizontal demand curve. An oligopoly is a market dominated by a few large suppliers. This may encourage them to absorb cost increases rather than pass it straight on to customers. To an oligopolist, business is a life of constant struggle as market conditions necessitate moves and counter moves. If any firm makes a price-cut it is immediately retaliated by the rival firms by the same practice of price-cut. There is an incentive for the cartel as a whole to restrict output and raise price, thereby achieving the joint profit maximizing result, but there is an incentive on the part of the members to increase individual profit.