Characteristics of Duopoly and Oligopoly Explained
Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both are entirely independent, and no agreement exists between them and may set a chain of reactions.
It is a market situation in which there are a few firms selling similar or differentiated products. It is difficult to pinpoint the number of firms in oligopoly’s market.
1. Uniformity of firms. They differ in size.
2. There are few sellers; a move by one seller immediately affects the rivals.
3. One product fortunes are dependent on policies and features of other produces in the industry.
4. Interdependence. Each oligopoly knows that changes in price, advertising, products, etc. may lead to competition by rivals.
Price Determination under Oligopoly
It is assumed that when the oligopolistic firm lowers price, its rivals will reset by matching that price cut in order to avoid losing their customers. If the oligopolistic firm increases cost, its competitors will not follow it and change their prices.
Why price rigidity?
a) Individual firms know the futility of price wars and thus prefer price stability.
b) They may be content with current prices.
c) They may be content with current price levels to prevent new entries.
d) A price may have been set through agreement or collusion.
Let’s now examine various forms of collusive oligopoly that are well known. The two most popular are the Cartels and Price Leadership. Let’s examine each.
It’s an association of independent firms within the same industry that has common policies relating to prices, outputs, sales, profit maximization and distribution of products.
Let’s examine the type of cartels that we have. They are;
1. Joint profit maximization cartel
It occurs when firms producing a homogeneous product surrender their price and output decisions making to a central board. It acts as a single monopoly.
Difficulties of a Cartel
· The formation of a cartel is a slow process which takes time.
· The larger the numbers of firms in a cartel, the more distrust there is.
· High cost un-economic firms refusing to shut -down or even leave the cartel.
· The cartel may not be able to change a very high price for the sake of an excellent public image and reputation.
2) Market Sharing Cartel
This is a state where firms enter into a market sharing agreement to form a cartel. There are two methods of market sharing:
a) Non – price competition.
b) Quota system.
Non-price competition cartel -.The low cost organizations press for low- price and high costs firms a higher rate. But eventually they agree on an average price below which they will not sell.
Markets sharing by quota agreement - Companies in an oligopolistic business enters into collusion regular agreed price .
It is collusion by oligopolistic firms, and all businesses follows the lead of a single big firm. A most popular type is Barometric Price Leadership model.
Barometric Price Leadership (BPL) model
In this case, we have no leaders firm amongst the oligopolistic firms, but the one firm with the shrewdest management makes price changes first, and followed by other organizations in the industry.
BPL develops due to:-
· A reaction to the earlier expense of violent price changes.
· Most firms do not possess the expertise to calculate cost and demand conditions of the industry.
· One firm possesses better knowledge and predictive power about changes indirect cost, style and quality changes in the economic conditions as a whole.
Scale of Production
Types of Business Units
Laws of Returns
Concept of Revenue
Applying economic concepts
1. What policies could your government be using to discourage monopolies?
1. Explain the impact of the possible effect of the entrance of a new investor in the monopolized market of carbon dioxide production in Kenya.
1. Can you define what labour is?
It’s both mental and physical work undertaken for monetary reward.
2. Discuss the economic effects of machinery.
It has revolutionized methods of production, increased productivity, manufacturing, and income hence, rapid economic growth.
3. What the characteristics of capital?
· Man produces capital.
· Capital is a passive factor of production, and it’s produced with the help of active services of labor.
· Capital is a produced means of production. It’s not automatic but its produced with joint efforts of labor.
· Capital is more mobile than other factors of production. It also depreciates.
4. What do you understand by internal economics?
They occur to a firm when its costs of production are reduced and output increases.
5. State what is a public sector undertaking?
They are Industrial and commercial undertakings owned by the government
6. Can you now define the Law of Diminishing Returns? (LDR).
It occurs when the proportion of one factor in a combination of factors is increased; after a point, the average and marginal products of that factor will diminish.
7. Explain what a cartel is.
It is an association of independent firms within the same industry. They follow common policies relating to prices, outputs, sales, profit maximization, and distribution of products.