Marketing channels coordinate the flow of the product, its payments, its information and promotional messages from the firm to the ultimate buyer. In case their cost curves differ, their market shares will also differ. It avoids price wars among rivals. For example, we have a number of petrol pumps in the city. In such a situation, the demand curve of the oligopolist will have inverted kink. Under this method, usually one firm sets a price and the other firms follow.
B Price leadership is possible under both product homogeneity and differentiation or heterogeneity. Examples Percentage of Output Produced by Firms in Selected Low Concentration U. Producing an output of Q selling at price P maximizes the profits of the firm. Since there are only a few firms selling a homogeneous or differentiated product inoligopolistic markets, the action of each firm affects the other firms in the industryand vice versa. Assumptions : The analysis of joint profit maximisation cartel is based on the following assumptions: 1. Each firm thinks that its own demand curve is more elastic than the market demand curve because its product is a perfect substitute for the product of its rivals. However, it is much more difficult for an oligopoly to determine at what output it can maximize its profit.
We have firms producing homogeneous and differentiated products under each of the two basic structures. Therefore, each firm views its demand as inelastic steeper for price cuts, which means they will not want to lower prices since total revenue falls when demand is inelastic and prices are lowered. But the main agreement relates to the sharing of the market equally among member firms so that each firm gets profits on its sales. The price of the product determines the policy of the cartel. Oligopoly is the most prevalent form of market organization in the manufacturingsector of most nations, including India. These firms compete with each other based on product differentiation, price, customer service etc.
The market demand curve for the product is given and known to the cartel. Economists measure advertising and promotion efforts on the part of a firm in terms of Advertising Promotional Elasticity of Demand which measures the responsiveness of sales to changes in advertising and promotional expenses. However, over time, technological advances eventually erode even a monopoly's power. If the dominant firm keeps prices stable, other firms are reluctant to change. Sweezy assumes that if the oligopolistic firm lowers its price, its rivals will react by matching that price cut m order to avoid losing their customers.
Thus non-price competition involves efforts by an oligopolist to differentiate his product from that of his rivals by establishing real or imaginary differences in the minds of consumers through the quality of the product, its technological level, and through service, marketing and promotional means. This is based on the implicit assumption that there is direct marketing of the product to buyers. In case of a differentiated product also prices can be uniform. Here accessibility is likely to be an important factor. Advertising differentiates one product from another and makes the product better known than others.
A fascinating example of tit-for-tat in action occurred during the trench warfare of the First World War. All firms in an oligopolistic industry enter into a collusion for charging an agreed uniform price. Oligopolies, like monopolies and , also have excess capacity. Since competitors can react in many different ways depending on the nature of the industry, the type of product, etc. 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. In the United States, insurance rating information is exempted from the antitrust provisions of the United States. Organizations have similar cost curves Types of Price Leadership : Price leadership helps in stabilizing prices and maintaining price discipline.
When a cartel raises the price of the product and increases the profits of its members, it creates an incentive for new firms to enter the industry. Before extensive world trade, oligopolies developed independently in many modern economies. The temptation to cheat; d. The graph below shows a typical dominant firm model: The black line represents industry demand, which is the total demand for the market ie. A recent example occurred in the breakfast cereal industry in which Kellogg had been the traditional price leader. The number of buyers is large.
So the noncolluding firm will not want to raise prices. This substitution is allowed because following firms produce where price equals marginal cost in order to maximize profit. Each firm has an influence on prices and they exercise this by choosing the quantity in which to manufacture the product. The Model of the Low-cost Price Leader: We will illustrate this model with an example of duopoly. As a result, the industry evolved from dominant firm to barometric price leadership. This is shown in the figure as the curve below the existing price P1.
It is quite popular in industries like cigarette industry. Source: Peterson and Lewis, 2002. Definition - Oligopoly A market structure in which a few firms sell either a standardized or differentiated product into which entry is difficult in which the firm has limited control over product price because of mutual interdependence except when there is collusion among firms and in which there is typically nonprice competition. In economics, successful product differentiation is inconsistent with the conditions for perfect competition, which include the requirement that the products of competing firms should be perfect substitutes. The firm with the lowest cost will charge a lower price P A and this price will be followed by the high-cost firm, although at this price firm B the follower does not maximize its profits.