QUESTIONS 1.What are the principal features of an oligopolistic market? 2.Draw and label the demand curve facing oligopolists. Explain the shape. 3.What is a cartel?

OLIGOPOLY Oligopoly is a market form characterized by a few sellers and a large number of buyers. The products or services sold can be homogenous or heterogeneous. If the former, it is ‘pure oligopoly’. In the latter case it is heterogeneous or differentiated oligopoly.

Examples of oligopolistic markets in India. -Petrol and diesel - motor cars -Refrigeration

In oligopoly, each firm makes output and pricing decisions keeping in mind the possible response of rival firms. This interdependence is the unique characteristic of oligopoly. Unlike as in perfect competition where increase or decrease in supply by an individual firm has no impact on market demand, in oligopoly where only a few firms are catering to the entire market, if one firm increases or decreases its market share – say by large scale advertising – cetirus paribus, it is sure to affect the market share of its competitors.

KINKED DEMAND CURVE

The motivation behind this kink is the idea that in an oligopolistic market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is therefore more price elastic for price increases and less so for price decreases.

Characteristics Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs.

Product differentiation: Product may be standardized (steel) or differentiated (automobiles).

Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.

Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.

Ability to set price: Oligopolies are price setters rather than price takers.

Entry and exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms.

Price rigidity is the defining characteristic of an oligopoly as enunciated in the kinked demand curve model. If any firm reduces price of its product, all rival firms will follow that strategic posture so as to retain their respective market shares. BUT The rival firms refrain from increasing their product prices if any one of them does so, anticipating an increase in their market share at the expense of the firm which increases the price of its product.

CARTEL A cartel is an agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous. Cartel members may agree on such matters as price fixing, total industry output, market share, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition.

One can distinguish private cartels from public cartels. In a public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. Contrariwise, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Competition laws often forbid private cartels. Identifying and breaking up cartels is an important part of the competition laws in most countries, although proving the existence of a cartel is rarely easy.

COLLUSION Collusion is an agreement between two or more persons, sometimes illegal, and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms to divide the market, set prices, or limit production. It can involve "wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties".In legal terms, all acts effected by collusion are considered void.

In the study of economics and market competition, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. Cartels are a special case of explicit collusion. Collusion which is not overt, on the other hand, is known as tacit collusion.