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Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly :The Karnataka State Open University established on 1st June 1996 vide Karnataka Govt. Notification No. ED 1 UOV 95 dated 12th February 1996 – KSOU Act 1992 is considered to be a reputed Open University amongst the open learning institutions in the country. Keeping in view the educational needs of our country, in general, and state in particular the policies and programmed have been geared to cater to the needy.

Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly :Economics is a social science concerned with the production, distribution and consumption of goods and services. It studies how individuals, businesses, governments and nations make choices on allocating resources to satisfy their wants and needs, and tries to determine how these groups should organize and coordinate efforts to achieve maximum output.

Types of Economics

Economics study is generally broken down into two categories.

  • Microeconomics focuses on how individual consumers and producers make their decisions. This includes a single person, a household, a business or a governmental organization.  Microeconomics ranges from how these individuals trade with one another to how prices are affected by the supply and demand of goods. Also studied are the efficiency and costs associated with producing goods and services, how labor is divided and allocated, uncertainty, risk, and strategic game theory.
  • Macroeconomics studies the overall economy.  This can include a distinct geographical region, a country, a continent or even the whole world. Topics studied include government fiscal and monetary policy, unemployment rates, growth as reflected by changes in the Gross Domestic Product (GDP) and business cycles that result in expansion, booms, recessions and depressions.

There are also schools of economic thought. Two of the most common are Classical and Keynesian. The Classical view believes that free markets are the best way to allocate resources and the government’s role should be limited to that of a fair, strict referee. In contrast, the Keynesian approach believes that markets  don’t work well at allocating resources on their own, and that governments must step in from time to time and actively reallocate resources efficiently.

Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly : An oligopoly (from Ancient Greek ὀλίγος (olígos), meaning ‘few’, and πωλεῖν (polein), meaning ‘to sell’) is a market form in where a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. Oligopoly has its own market structure.

With few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.

Download here Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly :  Oligopoly is a common market form where a number of firms are in competition. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. For example, as of fourth quarter 2008, if we combine total market share of Verizon Wireless, AT&T, Sprint, and T-Mobile…we see that these firms, together, control 97% of the U.S. cellular telephone market.

Oligopolistic competition can give rise to both wide-ranging and diverse outcomes. In some situations, particular companies may employ restrictive trade practices (collusion, market sharing etc.) in order to raise inflate prices and restrict production in much the same way that a monopoly does. Whenever there is a formal agreement for such collusion, between companies that usually compete with one another, this practice is known as a cartel. A prime example of such a cartel is OPEC, which has a profound influence on the international price of oil.

Karnataka Class 12 Commerce Economics Oligopoly : Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development.There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other.

Characteristics

1.  Profit maximization conditions : An oligopoly maximizes profits.
2.  Ability to set price : Oligopolies are price setters rather than price takers.
3.  Entry and exit : Barriers to entry are high. The most important barriers are government licenses, economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.
4.  Number of firms : “Few” – a “handful” of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.
5.  Long run profits : Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.
6.  Product differentiation : Product may be homogeneous (steel) or differentiated (automobiles). 
7.  Perfect knowledge : Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.
8. Interdependence  : The distinctive feature of an oligopoly is interdependence.  Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore, the competing firms will be aware of a firm’s market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm’s countermoves. It is very much like a game of chess, in which a player must anticipate a whole sequence of moves and countermoves in order to determine how to achieve his or her objectives; this is known as game theory.
9. Non-Price Competition : Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition.

Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

Karnataka Class 12 Commerce Economics Oligopoly : Oligopolies become “mature” when they realise they can profit maximise through joint profit maximising. As a result of operating in countries with enforced competition laws, the Oligopolists will operate under tacit collusion, being collusion through an understanding that if all the competitors in the market raise their prices, then collectively all the competitors can achieve economic profits close to a monopolist, with out evidence of breaching government market regulations.

Firms in oligopoly

There are different possible ways that firms in oligopoly will compete and behave this will depend upon:

  • The objectives of the firms e.g. profit maximisation or sales maximisation.
  • The degree of contestability i.e. barriers to entry.
  • Government regulation

There are different possible outcomes for oligopoly:

  1. Stable prices (e.g. through kinked demand curve)
  2. Price wars (competitive oligopoly
  3. Collusion for higher prices.

The kinked demand curve model

Karnataka Class 12 Commerce Economics Oligopoly :  This model suggests that prices will be fairly stable and there is little incentive to change prices. Therefore, firms compete using non-price competition methods.

https://www.economicshelp.org/wp-content/uploads/2012/11/kinked-demand-curve.png

  • This assumes that firms seek to maximise profits
  • If they increase price, then they will lose a large share of the market because they become uncompetitive compared to other firms, therefore demand is elastic for price increases.
  • If firms cut price then they would gain a big increase in market share, however it is unlikely that firms will allow this. Therefore other firms follow suit and cut price as well. Therefore demand will only increase by a small amount. Therefore demand is inelastic for a price cut.
  • Therefore this suggests that prices will be rigid in oligopoly

The diagram above suggests that a change in marginal cost still leads to the same price, because of the kinked demand curve  remember profit maximisation occurs where MR = MC at Q1.

Karnataka Class 12 Commerce Economics Oligopoly Complete Notes

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