Page 192 - DECO405_MANAGERIAL_ECONOMICS

Unit 12: Oligopoly

insignificant. When any firm takes an action its rivals will in all probability react to it (i.e. Notes
retaliate). The behaviour of oligopolistic firms is interdependent and not independent or
atomistic as is the case under perfect or monopolistic competition.
2. The demand curve of an individual firm under oligopoly is not known and is indeterminate
because it depends upon the reaction of its rivals which is uncertain. Each theory of
oligopoly therefore makes a specific assumption about how rivals will (or will not) react
to an individual firm's action.
3. In view of the uncertainty about the reaction of rivals and interdependence of behaviour,
oligopolistic firms find it advantageous to coordinate their behaviour through explicit
agreement (cartel) or implicit, hidden, understanding (collusion). Also because the number
of firms is small, it is feasible for oligopolists to establish a cartel or collusive arrangement.
However, it is difficult as well as expensive to monitor and enforce an agreement or
understanding. Very few cartels last long, particularly when oligopolistic firms
significantly differ in their cost conditions.
4. Under oligopoly, new entry is difficult. It is neither free nor barred. Hence the condition
of entry becomes an important factor determining the price or output decisions of
oligopolistic firms, and preventing or limiting entry an important objective.
5. Given the indeterminacy of the individual firm's demand and, therefore, the marginal
revenue curve, oligopolistic firms may not aim at maximization of profits. Modern theories
of oligopoly take into account the following alternative objectives of the firm:
(a) Sales maximization with profit constraint.
(b) Target or "fair" rate of profit and long-run stability.

(c) Maximization of the managerial utility function.
(d) Limiting (preventing) new entry.
(e) Achieving "satisfactory" profits, sales, etc. That is, the firm is a "satisficer" and not
"maximizer".
(f) Maximization of joint (industry) profits rather than individual (firm) profits.
In view of the fact that the characteristics of oligopoly renders collusion (explicit or implicit
cartel) advantageous and feasible, theories of oligopoly are divided into three broad groups,
namely, models of non-collusive oligopoly, models of collusive oligopoly, and managerial
theories.
The important models of non-collusive oligopoly are: (a) Cournot model, (b) Kinked demand
curve models.
The two major theories of collusive oligopoly are: (a) Joint profit maximization, and (b) Price
leadership.
Emphasizing the distinguishing characteristics of joint stock enterprises are the three models of
managerial theory, namely, (a) Sales maximization with profit constraint, (b) Maximization of
managerial utility function, and (c) Firm as a satisficer (behaviourist theory).

12.2 Collusive Oligopoly Models

There can be two types of collusion (a) Cartels where firms jointly fix a price and output policy
through agreement, and (b) Price Leadership where one firm sets the price and others follow it.

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