When other firms come to know of this, they will leave the cartel. By making decisions more complex - such as financial decisions about mortgages - individual consumers fall back on heuristics and rule of thumb processes, which can lead to decision making bias and irrational behaviour, including making purchases which add no utility or even harm the individual consumer.
Limit pricing Limit pricing means the incumbent firm sets a low price, and a high output, so that entrants cannot make a profit at that price. If the oligopoly, in our example, reduces its price, competitors will lose their customers quickly and so they will be forced to match this price cut.
They may be charging a price slightly above or below the profit maximisation price depending upon its cost conditions. In this hypothetical case, the 3-firm concentration ratio is If they enter into a common price agreement, it would be in the interest of the high-cost firm to sell more quantity at a lower price set by the price leader by earning a little less than the maximum profits.
An industry which is dominated by a few firms. The market demand curve for the product is given and is known to the cartel. The main features of oligopoly: Cost-plus pricing can also be explained through the application of game theory.
If colluding, participants act like a monopoly and can enjoy the benefits of higher profits over the long term. This will force the cartel to break down.
In case the cost curves of the firms forming a cartel differ, the low-cost firms may not stick to the common price. An oligopolistic firm tries to differentiate its product from that of its rivals in order to raise the demand for its product and to make its demand curve less elastic.
Co-operation reduces the uncertainty associated with the mutual interdependence of rivals in an oligopolistic market. In case their cost curves differ, their market shares will also differ.
Cost-plus pricing is very useful for firms that produce a number of different products, or where uncertainty exists. Also, this rigidity makes tacit agreement more easily possible. The small firms will sell OQs output at this price for, the marginal cost curve of the small firms equals the horizontal price line P1 R at C.
In the above example, the industry was initially competitive Qc and Pc. There is a tacit agreement among the firms to sell the product at a price set by the leader of the industry i.
Similarly, it may direct its technological effort towards the specific requirements of its targeted buyers. It is not designed to deal with oligopolistic price and output determination.
The board determines output quotas for its members, the price to be charged and the distribution of industry profits. Price cuts are matched by price cuts but price increases are not.
This model tries to explain the price-rigidity often observed in oligopolistic markets.Oligopoly (Economics) 1) Main assumptions of Oligopoly 2) Price stability in Oligopoly. Essay by lucianabg_2, High School, 12th grade, B+, July download word file, 3 pages download word file, 3 pages 2 votes4/5(2).
Transcript of Assumptions of Oligopoly. Economics Course Companion Blink & Dorton Chapter 10 High barriers of entry Mutual Interdependence Higher the percentage --> more concentrated market power Concentration ratio Is the concentration of firms in an industry City Big price difference Expensive.
The main assumptions of price leadership model under oligopoly are as under: (a) There are two firms A and B in the market. (b) The output produced by. Definition of oligopoly. Main features. Diagrams and different models of how firms can compete - kinked demand curve, price wars, collusion.
Price wars. Firms in oligopoly may still be very competitive on price, especially if they are seeking to increase market share. Oxford University and works as an economics teacher and writer.
Find. Monopolistic Competition and Oligopoly | Economics. The main differences between monopolistic competition and oligopoly are the number and size of the firms in the market place; these characteristics also determine the impact of a single firm’s pricing decisions.
the firm can earn excess profits in the short run with a price of P 1. Given these assumptions, the price-output relationship in the oligopolist market is explained in Figure 1 where KPD is the kinked demand curve and OP 0 the prevailing price in the oligopoly market for the OR product of one seller.Download