If both companies would only keep prices high, they will jointly maximise profits. If the product is homogeneous, we have a pure oligopoly. Surendra Labh, Bhawani Prasad Khanal and Neelam Prasad Chaulagain. Human capital differentiation, where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on. Steel was once again willing to play by industry rules.
The sources of oligopoly are generally the same as for monopoly. Let us first study price determination in short period. In this the basic problem is to determine the price, which maximizes cartel profit. The oligopolists push non-price competition beyond socially desirable limits. In short period there is only partial equilibrium as out of the two conditions for full equilibrium only one is possible, viz : the individual firm will be producing equilibrium output or an output where marginal cost equals marginal revenue. Since the marginal cost of firm B is greater than the marginal cost of firm A, therefore, the profit earned by firm B will be lesser than the profit earned by firm A. This is because the price for the product is greater than the members marginal cost of production.
In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. This is the natural result of fewness. It is further illustrated in the following diagram:. At this point of equilibrium, an increase or decrease in price would lead to losses. Producing an output of Q selling at price P maximizes the profits of the firm.
But as stated above, price is not the only factor of competition. There is no time to increase the fixed factors of production like machinery, building etc. Source: Peterson and Lewis, 2002. But according to Schumpeterian hypothesis, imperfect competition actually promotes the invention and technological advances which offset the efficiency loss from too high prices. This is shown in Figure. But he cannot fix both the price and also force the people to buy a pre-determined quantity at that price. Since an oligopolist knows that its own actions will have a significant impact on the other oligopolists in the industry, each oligopolist mustconsider the possible reaction of competitors in deciding its pricing policies, the degree of product differentiation to introduce, the level of advertising to be undertaken, the amount of service to provide, etc.
Advertising is deceptive and annoying. The entry of new firms would continue as long as there are economic profits. The total abnormal profit of the firm is illustrated in Fig. Thus each firm hesitates to adopt price-cut method and this enables each firm to earn some abnormal profits in the short period. The conductor knows that if Tchaikovsky confesses, he gets either 25 years by holding out or 10 years by confessing.
As pointed out above, the demand curve is indeterminate and no single price-output decision is possible. In the short run, therefore, the firm will be in equilibrium when it is maximising its profits, i. The four-firm concentrationratio for most manufacturing industries in the United States is between 20 and 80percent. Since competition is imperfect, one price does not rule throughout the market. There is no single theory which satisfactorily explains the oligopoly behaviour regarding price and output in the market. The number of firms in the industry may be two or more than two but not more than 20.
Thus, like a monopoly, marginal revenue continually declines as quantity is increased. Monopolistic competition normally exists when the market has many sellers selling differentiated products, for example, retail trade, whereas oligopoly is said to be a stable form of a market where a few sellers operate in the market and each firm has a certain amount of share of the market and the firms recognize their dependence on each other. Collusion is an oligopolistic situation in which two or more firms jointly set their prices or outputs, divide the market among them, or make other business decisions jointly. There are a large number of firms each producing a machine of a different brand—Singer, Usha, Kamla, Shan, Rita, etc. Kathmandu: Jupiter Publisher and Distributors Pvt. What would happen if all members did the same? There are set of theories like Cournot Duopoly Model, Bertrand Duopoly Model, the Chamberlin Model, the Kinked Demand Curve Model, the Centralised Cartel Model, Price Leadership Model, etc.
However, this is may be outweighed by the advantages of diversity and choice. This should be remembered that though different firms may be producing different amounts and charging different prices and earning different normal profits but each will have its marginal cost equal to its marginal revenue and its average revenue curve just touching the average cost curve. The fact that one must have millions to spend on advertising just to get started often makes entry into a firm difficult. The above are not only the sources of oligopoly but also represent the barriers to other firms entering the market in the long run. Hence competition is no longer exclusive on price basis. The new firms may not sell the same products but will sell similar products. By taxing monopolies, a government can reduce monopoly profits, thereby softening some of the socially unacceptable effects of monopoly.
In fact, he sets the price. . For example, aprice decrease from P1 to P2 will result in a movement along dd and increase salesfrom Q1 to Q2 as customers take advantage of the lower price and abandon othersuppliers. While entry into anoligopolistic industry is possible, it is not easy as evidenced by the fact that thereare only a few firms in the industry. It will earn abnormal profits because in the short period, the rival firms cannot cut the prices. If firms in the industry was initially suffering losses, then firms will be leaving the industry. We may mention the following functions which price performs: i Price controls consumption: If the price goes up.