Price determination under oligopoly

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Price determination under oligopoly

Price and Output Determination under Oligopoly

Price and Output Determination under Oligopoly! A diversity of specific market situations works against the development of a single, generalized explanation of how an oligopoly determines price Price determination under oligopoly output.

Pure monopoly, monopolistic competition and perfect competition, all refer to rather clear cut market arrangements; oligopoly docs not. Other firms share the balance. It includes both differentiation and standardization.

It encompasses the cases in which firms are acting in collusion and in which they are acting independently.

Price determination under oligopoly

Therefore, the existence of various forms of oligopoly prevents the development of a general theory of price and output. The element of mutual interdependence in oligopolistic market further complicates the determination of price and output.

In-spite of these difficulties, two interrelated characteristics of oligopolistic pricing stand out: Oligopolistic prices tend to be inflexible or Sticky Price change less frequently in Oligopoly than they happen under other competitions like perfect, competition, monopoly and monopolistic competition.

When oligopolistic prices change, firms are likely to change their prices together they act in collusion in setting and changing prices. Keeping these facts in mind, the price and output determination under oligopoly is in the following situations: Price Determination in Non-Collusive Oligopoly: In this case, each firm follows an independent price and output policy on the basis of its judgment about the reactions of his rivals.

If the firms are producing homogeneous products, price war may occur.

Price determination under oligopoly

Each firm has to fix the price at the competitive level. On the contrary, in case of differentiated oligopoly, due to product differentiation, each firm has some monopoly control over the market and therefore charge near monopoly price.

Thus the actual price may fall between the two limits: Practically, there is every possibility to determine the exact price within these limits. However there may be the following possibilities: So long as the firm earns adequate profits at the prevailing price, it may not try to change it.

Any effort to change it may create uncertainties in the market. A firm will stick to that price to avoid uncertainties.

Price and Output Determination under Oligopoly! A diversity of specific market situations works against the development of a single, generalized explanation of how an oligopoly determines price and output. MONOPOLISTIC COMPETITION Edward Chamberlin, who developed the model of monopolistic competition, observed that in a market with large number of sellers, the products of individual firms are not at all homogeneous, for example, soaps used for personal wash. Price and Output Determination Under Oligopoly: Definition of Oligopoly: Oligopoly falls between two extreme market structures, perfect competition and monopoly. Oligopoly occurs when a few firms dominate the market for a good or implies that when there are a small number of competing firms, their marketing decisions exhibit strong mutual interdependence.

Thus the price tends to be rigid where oligopolist takes independent action. The modern economists are of the view that independent price determination cannot exist for long in oligopoly.

It leads to uncertainty and insecurity and to overcome them there is a tendency among oligopolists to act collectively by tacit collusion. In addition, the firms can gain the economics of production. All the firms in oligopoly tend to enlarge their size and lower their costs of production per unit and capture maximum share of the market.

Collusive oligopoly is a situation in which firms in a particular industry decide to join together as a single unit for the purpose of maximising their joint profits and to negotiate among themselves so as to share the market. The former is known as: There is another type of collusion, known as leadership, which is based on tacit agreements.

Under it, one firm acts as the price leader and fixes the price for the product while other firms follow it. Price leadership is of three types:Published: Mon, 5 Dec When there is competition in firms on the basis of change in price, it is known as price competition.

Price competition can involve discounting the price of a product (or range of products) to increase its demand.

Collusive Oligopoly: Price and Output Determination under Cartel! In order to avoid uncertainty arising out of interdependence and to avoid price wars and cut throat competition, firms working under oligopolistic conditions often enter into agreement regard­ing a uniform price .

Three Important Models of Oligopoly: Three Important Economic Models of Oligopoly are as: (1) Price and output determination under collusive oligopoly. Price Determination under Oligopoly Oligopoly is that market situation in which the number of firms is small but each firm in the industry takes into consideration the reaction of the rival firms in .

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