Price and output determination under oligopoly. Price and Output Determination under Oligopoly 2022-12-15

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Oligopoly is a market structure in which a small number of firms dominate the industry. In this type of market, firms are interdependent, meaning that the actions of one firm will affect the others. This is because the actions of one firm can alter the market conditions, and therefore the profits of the other firms. As a result, firms in an oligopoly must consider the reactions of their competitors when making pricing and output decisions.

One way in which firms in an oligopoly may determine price and output is through collusion, which is when firms agree to act together in order to increase profits. This can take the form of price fixing, where firms agree to charge a certain price for their products, or output restriction, where firms agree to limit the amount of goods they produce in order to drive up prices. While collusion is illegal in most countries, it can be difficult to detect and enforce.

Another way in which firms in an oligopoly may determine price and output is through a process called strategic pricing. In this approach, firms take into account the expected reactions of their competitors when setting prices and production levels. For example, if a firm expects its competitors to lower their prices in response to a price increase, it may decide to not raise its prices in order to avoid losing market share. Alternatively, if a firm expects its competitors to raise their prices in response to a price decrease, it may decide to lower its prices in order to increase its market share.

In addition to considering the actions of their competitors, firms in an oligopoly may also consider the demand for their products when determining price and output. For example, if demand is high, firms may choose to raise their prices and increase production in order to maximize profits. On the other hand, if demand is low, firms may choose to lower their prices and decrease production in order to increase sales and reduce excess inventory.

One notable feature of oligopoly is the presence of non-price competition, where firms compete with each other through means other than price. This can include advertising, product differentiation, and service quality. Non-price competition can be an effective way for firms to differentiate themselves from their competitors and attract customers.

In conclusion, the determination of price and output in an oligopoly is a complex process that involves considering the reactions of competitors, demand for the product, and the use of non-price competition. Firms must carefully weigh these factors in order to maximize profits and maintain a competitive advantage in the market.

Price And Output Determination Under Oligopoly [dvlrj6pmrj4z]

price and output determination under oligopoly

The rivals will not increase the price in order to sell more at a lower price. The collusions can be classified into: ADVERTISEMENTS: a Cartels- In cartels firms jointly fix the price and output through a process of agreement. Similarly, For there the new entrant may also fear provoking a price war by the established firm in the industry. Thus the low-cost firm becomes the price leader. There is a price leader who is followed by the followers. The net result is the same output OR at the same price OP 0 and larger profits for the oligopolistic sellers.

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Price and Output Determination under Oligopoly

price and output determination under oligopoly

This may ultimately lead to excess capacity and uneconomic firms in the industry. Cournot-Nash model The Cournot-Nash model is the simplest oligopoly model. When an individual seller reduces the price of product the customers of his competitors will be attracted and rival firm may also reduce the price. In that case if the firms agree on the price OP, new firms will enter the industry, reduce their sales and profits. The level of this price will be such as will ensure some profits to high-cost firms. Therefore, long-run profits will not possible without the blockage of industrial entry. The kinked demand curve theory suggests that there will be price stickiness in these markets and that firms will rely more on non-price competition to boost sales, revenue and profits.


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Collusive Oligopoly: Condition

price and output determination under oligopoly

Tacit collusion occurs where firms undertake actions that are likely to minimise a competitive response, e. The likelihood of competition between leader and individual firms is far cry. Let us make the following assumptions before we commence our discussion: 1 In the model, there are two only firms, 1 and 2. MRc curve is the marginal revenue curve. In the above diagram, MCa is the marginal cost curve of firm A and MCb is the marginal cost curve of firm B. This may ultimately lead to the breakdown of the cartel.

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Different Models for Price and Output Determination Under Oligopoly

price and output determination under oligopoly

They follow the policy of price rigidity. It is difficult to make an accurate estimate of the market demand curve. The supply of dominant firm on this price is zero. Though the firms agree not to sell at a price below the fixed price they are free to vary the style of their product and the advertising expenditure and to promote sales in other ways. Similarly, if the dominant firm fixes OP 3 price the market demand is P 3L 2. There are many government policies that can promote vigorous rivalry even among large firms. This type of market is practically a monopoly and an attached perfectly competitive market in which price is set by the dominant firm rather than the market.

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Price and Output Determination under Collusive Oligopoly

price and output determination under oligopoly

As under monopoly, the cartel board will allocate the industry output by equating the industry MR to the marginal cost of each firm. It will, therefore, sell OQ a quan­tity at a lower price OP 1even though it will not be earning maximum profits. Threat of Entry Potential Rivals Since there are no entry barriers for new firms in the market of collusive oligopoly. Conclusion :- Similarly, The above explanation clearly indicates the meaning, definition, causes and margins of an oligopoly market. But if firm В sticks to OP price, its sales will be zero because the product being homogeneous, all its customers will shift to firm A. No determinate Learn more about Collusive Oligopoly According to this model, firms form a cartel.

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How to Determine Price and Output under Oligopoly?

price and output determination under oligopoly

Here the firm is a price taker from the market. In case a price below ОР 2 is set the dominant firm would meet the entire industry demand- and the sales of the small firms would be zero. Therefore it can be seen that when firm1 produces OQ 1 level of output and firm2 produces OQ 2 level of output the maximum joint profits for the member firms of the cartel is ascertained. This agreement may be either tacit or explicit. This is very common in the American economy. This collaboration will help them earn profit jointly and would cause no harm to the other.

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Price and Output Determination Under Oligopoly

price and output determination under oligopoly

This is because at price OP, it can sell OS output like firm 1 because the demand curve facing each firm is the same. Price leadership maybe considered as an imperfect form of collusion among the oligopoly firms. Price-Output Determination under Price Leadership by the Dominant Firm: We assume that the dominant firm is aware of the total market demand curve for the product. Oligopoly markets can exist between the extreme conditions of a market which is either a perfect competition market or a monopoly market. An Oligopoly market condition exists between two of the most extreme market conditions; i. M swezy nall and hich.

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Pricing Determination under Oligopoly Market

price and output determination under oligopoly

Cartels cause serious obstruction and curtailment of the competitive environment in the economy. During the bargaining process, two criteria are usually adopted to fix the quotas of the firms. I he price of the product fixed by the cartel cannot be changed even if the market conditions require it to be changed. At OP price the total demand of the commodity is OM. Every seller can exercise an important influence on the price-output policies of his rivals. Non-price competition involves advertising and marketing strategies to increase demand and develop brand loyalty among consumers.

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