OLIGOPOLY&

GAME THEORY

Presented by Group 2:Zuha HandooSuhail QadirFoziyaMariya Qurat-Ul-AinAqib HussainMujeebSalman Farooq Dar

TYPES OF MARKET

STRUCTURE: Pure

(perfect) competitio

n

Monopolistic

competition

Oligopoly Monopoly

In decreasing order of level of competition

Oligopoly :Derived from the Greek word, “oligo’(few) “polo”(to

sell).Market dominated by a few large firms,

i.e.; Competition amongst the few.

• Yes• Same-Different

• Competitors

• Difficult

Ease of entry Competition

Control over price

Products

Characteristics of Oligopoly:Only “few” sellers.Homogeneous/Differentiated products.Imperfect knowledge.High barriers to entry.Mutual dependence.Non price competition.

Types of Oligopoly:1. Pure or Perfect Oligopoly: If the firms produce homogeneous products, then it is called pure or perfect oligopoly. Though, it is rare to find pure oligopoly situation, yet, cement, steel, aluminum and chemicals producing industries approach pure oligopoly.

2. Imperfect or Differentiated Oligopoly:If the firms produce differentiated products, then it is called differentiated or imperfect oligopoly.For example, passenger cars, cigarettes or soft drinks. The goods produced by different firms have their own distinguishing characteristics, yet all of them are close substitutes of each other.

3. Collusive Oligopoly: If the firms cooperate with each

other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly.In other words, the firms in a collusive oligopoly combines to avoid the competition among themselves regarding the price and output of the industry. For example, OPEC(Organization for petroleum exporting countries) serves the example for collusive oligopolies.

4. Non-collusive Oligopoly: If firms in an oligopoly market

compete with each other, it is called a non-collusive or non-cooperative oligopoly.The firms in non-collusive oligopoly tries to gain maximum share of the market by developing policies and strategies to outperform or beat their rivals.

5.Open oligopoly: An open oligopoly provides full

freedom to new firms to enter into industry.In the situation of open oligopoly there is no restriction of any kind for the desiring firm to enter into the market.

6.Closed oligopoly: A closed oligopoly refers to that market

structure where only few firms control the market and new firms are not allowed to enter industry. Barriers are set to prevent the entry of new firms into the industry. For example, patents,licences,requirement of large capital,control over crucial raw materials are some of the reasons which prevent new firms from entering into industry.

Barriers to entry:1. Access to suppliers & distributors2. Cost of entering a market3. Legal requirements4. Legal restriction5. Fear of retaliation

Examples of oligopoly:1. Smart Phone Operating Systems: The smart phone market is similarly

dominated by a handful of companies, the most powerful two being Google Android and Apple IOS. Those companies have deep relationships with the handset providers and are able to have their system pre – installed on each phone.

2.Computer Operating Systems: New high tech markets can become

oligopolies when the companies provide unique products that are supported by an ecosystem of supporting technology. Computer operating systems are dominated by Microsoft’s Windows, Apple’s Mac OS and the open source Linux operating systems. These three systems capture close to 100 % of the computer operating system market due to their established positions. According to the StatOwl website.

3.Music Industry: The music entertainment industry is

dominated by four music companies that control 80% of the market and these are universal Music Group, Sony Music entertainment, Warner Music Group.

35.10%

22.80%

21.10%

21.00%

universalsonywarnerothers

4.Auto industry: Auto industry is another example of an

oligopoly, which is dominated by few firms and these firms are Hero Motor Corp., TVS and Honda.

HERO: 40% Market Share Honda: 25% Market ShareTVS: 14% Market Share

40%

14%

25%

21%

HEROTVSHONDAOTHERS

5.Oligopoly in soft drink industry:Two firms control 74 % of soft drink sales:o 42.8% coca-cola’s 25 brands and 139

varieties.o 31.1% Pepsi’s 18 brands and 163 varieties. Coca-cola and Pepsi are in an oligopoly

market. They are mutually and strategically interdependent, as a decision made by one firm invariably affects the other. They are selling the homogeneous product so they can control over price.

42.80%

31.10%

26.10%

Series 1

coca-colaPepsiothers

Some other common examples:AirlinesSupermarketsSteel IndustryHealth Insurance, etc………

Models of oligopoly: Although there are many models which

explain oligopolistic market structure, but we will be discussing two over here.

These are:1: Kinked model2: Price Leadership model