Relationship Between Perceived Organisational Support

Chapter 10

Oligopoly and Firm Architecture.

10-1 Oligopoly And Market Concentration

Oligopoly: Meaning and Sources

We defined oligopoly as the form of market organization in which there are few sellers of a homogeneous of differentiated product.

• Two sellers → Duopoly
• If the product is homogeneous → Pure oligopoly
• If the product is differentiated → Differentiated oligopoly

Oligopoly is the most prevalent form of market organization in the manufacturing sector of industrial nations, including United States. Some of the oligopolistic industries in the United States are automobiles, primary alumunium, steel, electrical equipment, glass, breakfast cereals, cigarettes, and soaps and detergents.

Since there are only a few firms selling a homogeneous or differentiated product in oligopolistic markets, the action each firm affects the other firms in the industry and vice versa. From what has been said, it is clear that the distinguishing characteristic of oligopoly is the interdependence or rivalry among firm in the industry. Since an oligopolist knows that its own actions will have a significant impact on the other oligopolists in the industry, each oligopolist must consider the possible reaction of competitors in deciding its pricing policies, the degree of product differentiation to introduce, the level of advertising to undertake, the amount of service to provide, and so on.

Concentration Ratios, the Herfindahl Index, and Contestable Markets.

The degree by which an industry is determined by a few large firms is measured by concentration ratios. Another method of estimating the degree of concentration in an industry is the Herfindahl Index (H). This is given by sum of the squared values of the market shares af all of the firms in the industry. The higher of the Herfindahl index, the greater is the degree of concentration in industry.

10-2 Oligopoly Models

The Cournot Model

The Cournot model is using useful in highlighting the interdependence that exists among oligopolistic firms.  The basic behavioral assumption made in the Cournot Model is that each firm, while trying to minimize profits, assumes that the other duopolist holds its output constant at the existing level. The result is cycle of moves and countermoves by the duopolist until each one sells one-third of the total industry output.

The Kinked Demand Curve Model

The kinked demand curve model was introduced by Paul Sweezy in 1939 in an attempt to explain the price rigidity that was ofter observed in may oligopolistic models. Sweezy postulated that if an oligopolist raised its price, it would lose most of its customers because other firms in the industry would not follow by raising their prices. On the other hand, an oligopolist could not increase its share of the market by lowering its price because its competitors would not quickly match price cuts. As a result, according to Sweezy, oligopolist face a demand curve that has a kink at the prevailing price is highly elastic for price increases  but much less elastic for price cuts.

Cartel Arrangements

Collusion can be overt or explicit, as in centralized and market-sharing cartels, or tacit or implicit , as in price leadership models.

There are two types of cartels: the centralized cartel and the market-sharing cartel. As the name implies, he market-sharing cartel gives each member the exclusive right to operate in a particular geographical area. The most well known type of Cartel, however is the centralized cartel. This is format agreement among the oligopolistic producers of a product to set the monopoly price, allocate output among its members, and determine how profits are to be shared.

Price Leadership

One way of making necessary in oligopolistic markets without fear of starting a price war and without overt collusion is by price leadership. With price leadership, the firm that is recognized as the price leader initiates a price change and then the other firms in the industry quickly follow. The price leader s usually the largest or the dominant firm in the industry. It could also be the low-cost firm or any other firm (called the barometric firm) recognized as the true interpreter or barometer of changes in industry demand and cost conditions warranting a price change.