Page 204 - DECO405_MANAGERIAL_ECONOMICS

Unit 12: Oligopoly

But are such mesoeconomic structures economically efficient? Traditional view holds that Notes
being characterised by barriers to entry, mesoeconomic entitles can be expected to result
in a restriction of output short of the point of lowest unit costs and a corresponding market
price which yields substantial, if not maximum, economic profits. But Kenneth Galbraith,
in his book American Capitalism, challenged this view by arguing that mesoeconomic
firms, because of their inherent strengths, are necessary to ensure rapid technological
growth. They have the necessary financial muscle to undertake innovations and research.
Empirical research on this aspect has been ambiguous. Though consensus opinion has it
that big mesoeconomic industries are not big contributors to technological progress,
there are quite a few exceptions. The paints industry has been one.
The industry, recognising the need to differentiate itself from others, has been frequently
introducing technologically innovative products. The introduction of interactive paints
solutions, anti-bacterial exterior paints and washable plastic emulsion paints are just
some of the innovations. It is of interest that some leading researchers in this field have
tentatively concluded that technological progress in an industry may be determined more
by the industry's scientific character and "technological opportunities" rather than by its
market structures.

Question
Identifying the factors contributing to the paint industry for becoming oligopoly.

12.7 Summary

 Oligopoly is a situation in which only a few firms (sellers) are competing in the market for
a particular commodity.

 Under oligopoly, each firm controls an important proportion of the total supply. The
demand curve of an individual firm under oligopoly is not known and is indeterminate.
 Oligopolistic firm may form cartel or enter into collusion. There may be barrier to new
entrants.
 Theories of oligopoly are divided into three broad groups, namely, models of non-collusive
oligopoly, models of collusive oligopoly, and managerial theories.

 The collusive oligopoly models have cartel, and price leadership.
 There are four important sources of barriers to entry, such as product differentiation,
control of inputs by existing suppliers, legal restrictions and scale economies.

12.8 Keywords

Cartel: A formal collusive organisation of the oligopoly firms in an industry.

Monopoly: A market situation with a single supplier of a particular good or service.
Oligopoly: A situation in which few firms are competing in the market for a particular commodity.

12.9 Self Assessment

1. Fill in the blanks:

(a) Sweezy's model is based on the ....................... list approach.
(b) An oligopolistic firm is guided in its decisions by the ....................... demand curve.

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