An oligopoly is a market structure in which a small number of large firms have all or most of the sales in an industry.

Oligopolistic firms are like few cats in a bag.

Either they can scratch each other badly or can be together, if get comfortable with each other.

Two greek words “oligi” means “few” and “polein” means “to sell” make them as Oligopoly.

It lies in between monopolistic competition and monopoly.

Collusive Oligopoly refers to a form of oligopoly in which the competing firms collude so as to minimize competition and maximize joint profit by reducing the uncertainties arising due to rivalry and selling the goods and service at a monopoly price.

The firms cooperate and not compete, with one another with respect to price and output.

Reduce competition

 Create and maintain entry barriers

Mutualor interdependent

 Consumers receive fewer price benefits, due to monopoly

No need to incur expenses to create brand loyalty.

Non-collusive Oligopoly is the oldest theory of competition.

It refers to the oligopoly in which firms are in competition with each other.

In a non-collusive or non-cooperative oligopoly, the firms survive in a strategic environment, as they begin with a particular strategy without colluding with competitors.

Firms are independent of each other.

 There are a large number of firms.

 Barriers to entry are very less.

 It has strict government regulations.

 Each firm develops an expectation as to what the rivals firms are about to do.

1. Low cost price leader model

2. Market Dominant price leader model

4. Exploatiitve or Aggressive price leader model

A cartel is defined as a group of firms that gets together to make output and price decisions.

In particular, cartels tend to arise in markets where there are few firms and each firm has a significant share of the market.

Oligopolistic firms join a cartel to increase their market power.

Members work together to determine jointly the level of output that each member will produce and/or the price that each member will charge.

By working together, the cartel members are able to behave like a monopolist.

Cournot Model

Paul Sweezy (1939) introduced the concept of Kinked Demand Model to explain “Price Stickiness”

If a firm decreases the price, others will also do the same. So initially the firms
faces a highly elastic demand curve.

A price reduction will give some gains to the firm initially, but due to similar reaction by rivals, this increase in demand will not be sustained.

If a firm increases its price, others will not follow. Firm will loose large
number of customers to its rivals due to substitution effect.

Thus, an oligopolistic firm faces a highly elastic demand curve, in case of price fall and faces highly inelastic demand curve, in case of price rise.