Oligopoly

Millennia Anstandi
Oligopoly
Oligopoly is a market form wherein a market or ind
ustry is dominated by a small number of large selle
rs (oligopolists). The essence of an oligopolistic ma
rket is that there are only a few sellers. Oligopolies
can result from various forms of collusion which red
uce competition and lead to higher prices for consu
mers.
Oligopoly
Because an oligopolistic market has only a small gro
up of sellers, they're best off when they cooperate an
d act like a monopolist in producing a small quantity
of output and charging a price above marginal cost. T
here are powerful incentives at work that hinder a gro
up of firms from maintaining the cooperative outcome
because each oligopolist cares only their own profit.
Duopoly

Duopoly is the simplest type of oligopoly.

It's an oligopoly with only two members
of sellers. Oligopolies with three or more
members face the same problems as du
opolies.
Duopoly
There are two person who owns a
water well, Jack and Jill. They can
sell many water galons as many a
s they want without cost.
Duopoly
Oligopoly
Like monopolist, oligopolists are aware that incre
asing the amount they produce reduces the price
of their product, which in turn affects profits. Altho
ugh the monopoly outcome is more higher, each
oligopolist has an incentive to cheat. Self interest
makes it difficult for the oligopolist to maintain the
cooperative outcome in monopolistic way.
Oligopoly

How would an increase in the number of

sellers from 2 to 4 affect the price and th
e quantity of water in the town?
• If the sellers form a cartel
• If the oligopolists don't form a cartel
Oligopoly
Each sellers has the option to raise the production. There
are 2 effects the seller needs to consider.
• The output effect: because the price is above the ma
rginal cost, selling one more gallon of water at the goi
ng price will raise the profit.
• The price effect: raising production will increase the t
otal amount sold, which will lower the price of water a
nd lower the profit on all the other gallons sold.
Oligopoly
The larger the number of sellers, the less each seller is concerne
d about her own impact on the market price. When the oligopoly
grows very large, the price effect disappears altogether. In this c
ase, the production decision of each firm no longer affects the m
arket price and each firm takes the market price as given when d
eciding how much to produce and increasies the production as l
ong as the price is above marginal.
 Oligopoly
As the number of sellers in an oligopoly grows
larger, an oligopolistic market looks more and
more like a competitive market. The price app
roaches marginal cost and the quantity produ
ced approaches the socially efficient level.
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