TASK OF MICRONOMICS
RESUME OF
OLIGOPOLY MARKET
By:
Group II
Rizky Dea Narotama 110810251007
Andi Dinastyo 110810251010
Marza Ramadhan W. 110810251011
Mahaddiyah Rahmi 110810251012
Eka Ardha Nareswari 110810251013
Dini Optimasi 110810251014
Nirwan Sukmajati 110810251016
Mirza Ananta 110810251028
Retno Pusalia 110810251030
Study Progam of Management
International Class Of Management Department
Economics Faculty
University Of Jember
May 2012
Cover i
Content List ii
Enclosure List iii
Definition of Oligopoly Market 1
Characteristic of Oligopoly 1
The Kinds of Oligopoly Market 2
The Curve of Oligopoly 3
Maximum Profit in Oligoply Market 6
Market Obtacles of Oligopoly 6
Advantage and Disadvantage of Oligopoly Market 7
Refference 9
Enclosure 10
Enclosure List
The questions from Group 1 and group 3 about Oligopoly Market 10
The answer toward Group 1 and Group 3 questions 11
A. DEFINITION OF OLIGOPOLY MARKET
Oligopoly is a good market where is little firms that commonly has big measurement and capital. In oligopoly market, all firms be in an interdependent condition each other because an act of a firm very influence the other firm so that the other will be react. That reaction can be advantages or disadvantages, for the reactor firm or the firm that have been react.
The new firm isn’t easy to enter in the industry because there is an entry barries, like an efficient operation in an industry needs a big firm so that just few firm that needed to fulfill the market demand. Finally, in a long term, the total of firms that working in an oligopoly market stay in a little value. Yes, it is likely that weak entry barries make a new firms can enter the market easily. If this condition happen and the firms always enter the market, finally the oligopoly market will be changed into an monopolistic market.
B. CHARACTERISTIC OF OLIGOPOLY
1. Interdependence:
The firms under oligopoly are interdependent in making decision. They are interdependent because the number of competition is few and any change in price & product etc by an firm will have a direct influence on the fortune of its rivals, which in turn retaliate by changing their price and output. Thus under oligopoly a firm not only considers the market demand for its product but also the reactions of other firms in the industry. No firm can fail to take into account the reaction of other firms to its price and output policies. There is, therefore, a good deal of interdependences of the firm under oligopoly.
2. Importance of advertising and selling costs:
The firms under oligopolistic market employ aggressive and defensive weapons to gain a greater share in the market and to maximise sale. In view of this firms have to incur a great deal on advertisement and other measures of sale promotion. Thus advertising and selling cost play a great role in the oligopolistic market structure. Under perfect competition and monopoly expenditure on advertisement and other measures is unnecessary. But such expenditure is the life-blood of an oligopolistic firm.
3. Group behaviour:
Another important feature of oligopoly is the analysis -of group behaviour. In case of perfect competition, monopoly and monopolistic competition, the business firms are assumed to behave in such a way as to maximize their profits. The profit-maximizing behaviour on his part may not be valid. The firms under oligopoly are interdependent as they are in a group.
4. Indeterminateness of demand curve:
This characteristic is the direct result of the interdependence characteristic of an oligopolistic firm. Mutual interdependence creates uncertainty for all the firms. No firm can predict the consequence of its price-output policy. Under oligopoly a firm cannot assume that its rivals will keep their price unchanged if he makes charge in its own price. As a result, the demand curve facing an oligopolistic firm losses its determinateness.
The demand curve as is well known, relates to the various quantities of the product that could be sold it different levels of prices when the quantity to be sold is itself unknown and uncertain the demand curve can't be definite and determinate.
5. Elements of monopoly:
There exist some elements of monopoly under oligopolistic situation. Under oligopoly with product differentiation each firm controls a large part of the market by producing differentiated product. In such a case it acts in its sphere as a monopolist in lining price and output.
6. Price rigidity:
Under oligopoly there is the existence price rigidity. Prices lend to be rigid and sticky. If any firm makes a price-cut it is immediately retaliated by the rival firms by the same practice of price-cut. There occurs a price-war in the oligopolistic condition. Hence under oligopoly no firm resorts to price-cut without making price-output decision with other rival firms. The net result will be price -finite or price-rigidity in the oligopolistic condition.
C. THE KINDS OF OLIGOPOLY MARKET
There are three kinds of Oligopoly market if we seen from the ways of the firms to ward off the dependent and indeterminancy that happen inside of oligopoly market.
1) Non-Collusive Oligopoly
It’s mean that all firms stay working individual and consider that the other firms are its competitor.
2) Collusive Oligopoly
Some or all firms that inside in the industry have choosen to accompany in a formal collusion. This bundle is called “cartel” and formed with purpose to be able the power of oligopoly market.
3) Tacit Collusion
Where is in this type appear a price leadership. There are three kinds of price leadership:
a) Barometric firm, the firms with pleasure to suitable it’s sold price that have been fixed by barometer firm.
b) Dominant firm, there is no power from another firm. The firm just could to following the price that have been fixed by the dominant firm.
c) Low Cost firm, the firms be forced to follow the low cost firm price level and couldn’t fixed the output quantity based on each firm’s equilibrium condition.
D. THE CURVE OF OLIGOPOLY
Demand curve
In an oligopoly, firms operate under imperfect competition. With the fierce price competitiveness created by this sticky-upward demand curve, firms use non-price competition in order to accrue greater revenue and market share.
"Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend–"kink". Thus the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve.
Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity.
The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is therefore more price-elastic for price increases and less so for price decreases. Firms will often enter the industry in the long run.
Picture 1 course of balance demand curve
Description Picture:
Above part demand curve indicating that price of fixed competitive company, whereas the buttom part enable for competitor to change the price. Because demand curve mentioned suppose all, the price of company, and other is fixed so demand curve will break.
Above the kink, demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and the kink point. This is a theoretical model proposed in 1947, which has failed to receive conclusive evidence for support.
Picture 2 Kinked demand curve
Description picture :
Above part demand curve indicating that price of fixed competitive company, whereas the buttom part enable for competitor to change the price. Because demand curve mentioned suppose all, the price of company, and other is fixed so demand curve will break. demand is relatively elastic because all other firms' prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war.
The reaction of rivals to a price change depends on whether price is raised or lowered. The elasticity of demand, and hence the gradient of the demand curve, will be also be different. The demand curve will be kinked, at the current price.
Price stickiness
Even when there is a large rise in marginal cost, price tends to stick close to its original, given the high price elasticity of demand for any price rise.
Picture 3 Price stickiness
Description picture :
Above part demand curve indicating that price of fixed competitive company, whereas the buttom part enable for competitor to change the price. Because demand curve mentioned suppose all, the price of company, and other is fixed so demand curve will break. Relative demand will elastic because above on P. The dent in P have mean that MR curve will discontinu in this point. Because, the company hasn’t any reaction toward small alteration marginal cost curve . MC shift in MC1 because a large increase in cost causes only a small increase in price.
At price P, and output Q, revenue will be maximised.
E. MAXIMUM PROFIT IN OLIGOPOLY MARKET
To make maximum profit in oigopoly market, where the firms don’t do agreement between them, price level is have a rigid characteristic, is difficult for get the change. Inclined for constant in price level have been fixed from the start.
F. MARKET OBSTACLES OF OLIGOPOLY
Factors contributing are:
a) Economics Scale
Economies of scale that should be enjoyed can be a barrier in an oligopoly market, especially new companies. If a company can achieve a greater level of production, the more the lower the production cost per unit of production, so if there is market demand, the company is prepared to meet consumer demand. So the larger the number the more efficient sales activities produce.
b) Differences in economic costs
It is happen because :
1) The company long has thorough knowledge of the market so much dominate the market, so find out how to maximize production and reduce production costs
2) the old company employee more experienced and understand how to increase productivity and minimize production costs allow
3) The company is more known for a long time so it is more reliable if the bank needs funds
c) The specialty of the firm has long can reduce new company to enter the market because:
1) goods known
2) The difficulty of making the goods
3) the old company can make various kinds of goods of 1st kind items that reinforce the old firm in an oligopoly market occupied
G. ADVANTAGES AND DISADVANTAGES OF OLIGOPOLY MARKET
1. Advantages from Oligopoly Market
Two principal prime advantage of oligopoly there are :
1.1 Firm operation can reach high efficient and can discrease production cost
Because for the old firm can discrease the production cost as the consquence from their experience then more efficient because use well grounded employer so can increase their employer productivity beside that can discrease production cost, and then the old firm have cognizable by bank and profider so can be easy to get credit and get materials with low price.
1.2 A Firm always doing development and create new inovation
Because the oligopoly market have the different design character automatically utter developmental and create new inovation a firm can be alive flexible with condition ant situation.
2. Disadvantage from Oligopoly Market
2.1 The revenue distribution cann’t be spread evenly
because special for the creative firm automatically can make developping and create new inovation so the firm can increase their revenue, but different for other firm that not creative and inovation enough automatically their revenue can discrease so this problem cann’t be spread evenly revenue distribution.
REFERENCES
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Mankiw,N.G.2004.Principle of Economics.Salemba Empat:Jakarta.
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Enclosure 1
The Question from other Group About Oligopoly Market
a. Group 1
1. How is relationship between begin long term step to get profit with kinked demand curve?
(bagaimana hubungan antara tingkat awal jangka panjang untuk mendapatkan keuntungan dengan kinked demand kurva ?)
2. Why thats happen obatacle when a firm going to oligopoly industry ? and what the different with monopoly? Why the price of good in oligopoly market inclined change?
( mengapa terjadi hambatan ketika sebuah perusahaan masuk ke industri oligopoli? Dan apa perbedaannya dengan monopoli? Mengapa harga dalam pasar oligopoli cenderung berubah?)
b. Group 3
3. how to prohibit disadvantage from oligopoly ?
( bagaimana cara mencegah kerugian dari oligopoli ?
4. why the begin long term step can be happen ?
( mengapa tingkat keuntungan jangka panjang dapat terjadi?)
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