Saturday, 7 May 2011

Distinguish between Oligopoly and Duopoly and how the price and out put is determined in the Oligopoly

OLIGOPOLY :- oligopoly is the condition of a market where more than two or a few sellers are found in monopolistic position. Following are the conditions of oligopoly.

1. A FEW FIRMS :- The firm which control the m,market are few in number.

2. CONTROL OVER SUPPLY AND PRICE :- Each firm produces a large share of the total produced so it can affect the price by its own action.

3. ENTRY OF NEW FIRMS :- No doubt it is very difficult for a new firm to enter into the market but it is not completely blocked.Financially sound firm can enter into the market.

4. COMPETITION IN QUALITY :- The firms compete with each other in the quality of the product also. The firms spend a sufficient amount on the research.

5. INTERDEPENDENCE :- In Oligopoly there is an interdependence on each other. Because the policies of each firm affect the price and out put to other firm.

6. ADVERTISING :- A heavy amount is spent on the advertisement by the oligopoly to attract the consumers.

DUOPOLY :- Under duopoly there are only two firms which control the total supply of the market. Each firm produces the large share of the total out put and it can affect the price of the market. If both firm are producing the similar commodity it will be called pure duopoly.
If there is some difference in their products then it will be called differential oligopoly.


When there are few firms and they are producing homogeneous product and each firm is powerful in affecting the market.
If any firm decreases the price to attract the consumers, it becomes the cause of price war in the market. Following are the result of this war :

1. If any firm can reduce its cost and can provide the total supply of the market, it will become pure monopolist and other firms will leave the industry.
2. It is also possible that all firms may choose their leader and act upon his policies.

3. The firms sub-divide the areas among themselves and each firm should fix the price in its own area.

4. The firm may marge themselves and make a pure monopoly.

5. They may adopt the policy of differentiated product.

6. In the mutual interest of all the firms, they may fix one price that maximize joint profits by agreement.

OLIGOPOLY WITH PRODUCT DIFFERENTIATION :- In this situation, there is some difference among the product of various firms.As the difference of each firm product is greater than the others, their interdependence will be less. In this case if a firm increases the price of its product even then some buyers will buy its product. If a firm decreases the price, It can not attract all the customers of other firms. In this case a firm earns normal profit..We can explain it by the following diagram :

EXPLANATION :- In this diagram, total cost (TC), OHEF is equal to the total revenue (TR) OHEF. So each firm is earning normal profit.

KINKED DEMAND CURVE :- The kinked demand curve explains that in some cases there is no frequent changes in the market prices of the products. In the oligopoly market one firm has a powerful influence on the price. If any firm lowers the price, its total sale will increase. The increase in sale depends upon the behavior of other firms in the industry.If the rival firms lower the price then the first firm price, it decreases the sale of first firm. So the firm hesitate to compete in prices. The firms, however, compete with one another on the basis of quality and design.
So the demand curve which explains the price stability in the oligopoly market can be drawn.

EXPLANATION :- This demand curve DD is kinked point A. When the price is Rs. 8 per unit, a firm sells 50 units. The total revenue is 50 x 8 = Rs. 400.If a firm increases price up to RS. 10 and its sale decreases to 20 units. The revenue will be 20 x 10 = Rs. 200. In case the price lowers revenue will be 2 x 70 = Rs. 140/-. So a firm will prefer to sell the out put at prevailing market price of Rs. 8/- per unit.


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