ASSIGNMENT

MBA -505
SEC 01
Submitted to:
Aminur Rahman
Business school /Department of Economics
Submitted by:
Name: Shahina Ashraf
ID: 08000!
INDEPENDENT UNIVERSITY
BANGLADESH
(IUB)

OLIGOPOLY
"#I$"%"#&: A situation 'here there are only a fe' sellers in a particular economy 'ho
control a particular commodity( An oli)opoly is a mar*et form in 'hich a mar*et or industry
is dominated by a small number of sellers +oli)opolists,( "li)opoly is a common mar*et
form( As a -uantitati.e description of oli)opoly/ the four0firm concentration ratio is often
utili1ed( 2his measure e3presses the mar*et share of the four lar)est firms in an industry as a
percenta)e( In Economics/ an oli)opoly +from Ancient $ree* oli)oi 'hich means 4fe'4 and
pole in 'hich means 4to sell4, (In some situations/ the firms may employ restricti.e trade
practices +collusion/ mar*et sharin) etc(, to raise prices and restrict production(
"li)opolies can retain lon) run abnormal profits( Buyers ha.e only imperfect *no'led)e as
to price/ cost and product -uality( 2he distincti.e feature of an oli)opoly is interdependence(
"li)opolies are typically composed of a fe' lar)e firms( Each firm is so lar)e that its actions
affect mar*et conditions( 2herefore the competin) firms 'ill be a'are of a firm5s mar*et
actions and 'ill respond appropriately( "li)opoly/ in 'hich a mar*et is dominated by a small
number of firms 'hich o'n more than 607 of the mar*et(
Each oli)opolistic has to use )ame strate)ies to compete 'hile ha.in) the *in*ed demand
cur.e characteristic( 2he *in*ed demand cur.e leads to price ri)idity( E3amples are 8%S/
9edE3/ and D:#(
In addition/ because the cost of startin) a business in an oli)opolistic industry is usually hi)h/
the number of firms enterin) it is lo'(
;ompanies in oli)opolistic industries include such lar)e0scale enterprises as automobile
companies and airlines( As lar)e firms supplyin) a si1able portion of a mar*et/ these
companies ha.e some control o.er the prices they char)e( But there<s a catch because
products are fairly similar/ 'hen one company lo'ers prices/ others are often forced to follo'
suit to remain competiti.e(
In an oli)opoly/ competiti.e firms5 actions may cause reactions by their competitors( in an
oli)opoly/ a company must consider the potential effects of its actions on other firms( 9or
e3ample if a company cuts prices to undersell the competition/ other firms also lo'er prices
in response/ 'hich in turn reduces e.eryone5s profits(
An oli)opoly has hi)h barriers to entry( 2he products that the oli)opolistic firms produce are
often nearly identical and/ therefore/ the companies/ 'hich are competin) for mar*et share/
are interdependent as a result of mar*et forces(
Some example of oligopoly:
Example: An economy needs only 00 'id)ets( ;ompany = produces >0 'id)ets and its
competitor/ ;ompany &/ produces the other >0( 2he prices of the t'o brands 'ill be
interdependent and/ therefore/ similar( So/ if ;ompany = starts sellin) the 'id)ets at a lo'er
price/ it 'ill )et a )reater mar*et share/ thereby forcin) ;ompany & to lo'er its prices as
'ell(
Some examples of ol!opol" ma#$e%: Supermar*ets/ Ban*in) industry/ ;hemicals/ "il/
?edicinal dru)s/ broadcastin)(
I& Ba&!la'es( a& example of ol!opol": 'ould be mobile telephony 0 2here are only a fe'
operators/ e3amples of 'hich are: $rameenphone/ Airtel/ Robi/ ban)lalin*/ teletal*/ ;itycell(
Exemple of LUX a a! oligopoly i!"#$%y :
2hou)h #8= is produced in Ban)ladesh/ 8nile.er maintains the same standard all around the
)lobe( Since the demand for the beauty soap mar*et is to a )reat e3tent(
"li)opolistic/ .ariations to price lead to a price 'ar 'hich can e.entually brea* do'n
company<s mar*et share( So the price is affordable by most of the people( 8nile.er
Ban)ladesh has outsourced its distribution channels to third party distributors 'hich allo'
them distribute #8= in massi.e bul*s amountin) to around ten million pieces( It underta*es
the lar)est promotional acti.ities in the beauty soap industry(
?ar*et ;ompetition:
2he beauty soap industry has a fe' ma@or producers of 'hich 8nile.er holds mar*et share of
sli)htly less than >07( "ther competin) brands li*e 2ibbet/ Aromatic/ #ifebuoy and Aeya
ha.e started to ha.e stron) consumer base/ but #8=<s product features distribution and
promotional acti.ities ha.e created hi)h brand loyalty for 'hich it is still the mar*et leader(
$rounds behind #8= for 'hich it supports "li)opoly:
BSmall number of firms: In oli)opoly there are @ust a fe' firms( 2here must be se.eral firms
dominatin) the industry so that they really able to set the price( In our country/ this soap
mar*et has fe'er industries 'hich resembles 'ith the oli)opolistic feature(
BInterdependence: Chen there are only a fe' lar)e firms dominatin)/ the industry/ they
cannot act independently of one another( Each firm 'ill react to 'hat the other firm<s do in
terms of output and price/ as 'ell as to chan)es in -uality and product differentiation( In our
country 'e can see/ the price of e.ery soap bar includin) #u3 is 'ithin a certain ran)e and it
is affordable by rural people also(
BBarriers to entry: It is possible that certain barriers to entry ha.e pre.ented more competition
in oli)opolistic industries( Barriers may include le)al barriers/ such as patents/ control and
o'nership o.er critical supplies and so on( But there may be entry barriers of a less
o.er'helmin) *ind 'hich may result in the presence of some competitors but as many as
'ould create a mar*et structure of monopolistic competition( ?ay be that is 'hy there are
fe' soap industries in our country(
B#imit pricin): In oli)opolistic mar*et there is more than one competitor and they all share
the )oal of see*in) to pre.ent yet more competitors appearin) on the scene( 2he concept of
limit pricin) is @ust such a concept( It refers to the possibility that oli)opolists @ointly see* to
a)ree on a price 'hich is the hi)hest they char)e 'ithout promptin) a ne' entrant to appear(
2he hi)her the barriers to entry are/ then the hi)her is the possible le.el of the limit price(
BNon0%rice competition: By their .ery nature/ oli)opolistic firms do not usually e3hibit acti.e
price competition( It is an attempt by one oli)opolistic firm to attract customers by some
means other than a price differential( Bein) an oli)opolistic competitor #u3 follo'ed some
strate)ies as non0price competition strate)y(
Mo!opoli$i& &ompe$i$io!
?"N"%"#IS2I; ;"?%E2I2I"N: occurs 'hen there are many competitors in the mar*et/
but each company produces a similar but different product( 2he 4foundin) father4 of the
theory of monopolistic competition 'as ;hamberlin( In monopolistic competition/ 'e still
ha.e many sellers( No'/ ho'e.er/ they don<t sell identical products( Instead/ they sell
differentiated productsDproducts that differ some'hat/ or are percei.ed to differ/ e.en
thou)h they ser.e a similar purpose( %roducts can be differentiated in a number of 'ays/
includin) -uality/ style/ and con.enience/ location/ and brand name( ?onopolistic
competition is a form of imperfect competition(
?onopolistic competition is similar to perfect competition but some economist re)ard it as
perhaps more realistic/ because the products are differentiated +or Enon0homo)eneous<,(
?onopolistically competiti.e mar*ets ha.e a number of specific features:
?any firms
%roduct differentiation
9ree entry and e3it(
C(a#a)%e#s%)s of mo&opols%) )ompe%%*e ma#$e%s:
0 2here are many producers and many consumers in a )i.en mar*et/ and no business has total
control o.er the mar*et price(
0 ;onsumers percei.e that there are non0price differences amon) the competitors5 products(
0 2here are fe' barriers to entry and e3it(
0 %roducers ha.e a de)ree of control o.er price(
?onopolistic competition has many producers 'ith closely related substitutes( 2he main
characteristic of this industry is the differentiation practices used by the firms( Shiftin) the
demand cur.e and/or impro.in) -uantity demanded is the idea of ad.ertisin) under
monopolistic competition( ".er the counter cold remedies or pain relie.ers are e3amples(
:etero)eneous +sli)htly different, in monopolistic competiti.e mar*ets( And indi.idual firms
ha.e a de)ree of control o.er the price in monopolistic competiti.e mar*ets(
In monopolistic competition/ 2here is .ery little barrier to entry for these industries(
2herefore/ economic theory dictations those firms in a monopolistic competition should earn
1ero economic profit( If firms in the industry are earnin) e3cess profits/ this induces ne'
firms to enter the mar*et and puts do'n'ard pressure on profits( "n the other hand/ if firms
in the industry are losin) money/ firms 'ith e3it the mar*et( At e-uilibrium/ the price 'ill
e-ual a.era)e total costs/ and the firm 'ill earn no economic profit( ?onopolistic mar*ets are
considered inefficient because the output for each firm is less than the -uantity that 'ould
minimi1e total a.era)e costs( 2hus the industry has e3cess capacity(
Examples of mo&opols%) )ompe%%o&:
Example: In our country Ban)ladesh/ there are ice cream parlors and coffee stores in a busy
to'n centre to pi11a deli.ery businesses in a city in a local area( Small0scale nurseries and
care homes for older people mi)ht also fit into the mar*et structure *no'n as monopolistic
competition(
Examples of mo&opols%) )ompe%%o& are boo*s/ music/ mo.ies and restaurants/ clothin)
and shoes(
Example: Some people prefer ;o*e o.er %epsi/ e.en thou)h the t'o products are -uite
similar( But 'hat if there 'as a substantial price difference bet'een the t'oF In that case/
buyers could be persuaded to s'itch from one to the other( 2hus/ if ;o*e has a bi)
promotional sale at a supermar*et chain/ some %epsi drin*ers mi)ht s'itch +at least
temporarily,(
Some example of mo&opols%) ma#$e%: Restaurants/ clothin)/ shoes and ser.ice
industries in lar)e cities/ professions: dentist/ doctors etc(
Buildin) firms: plasterers/ plumbers etc(
T'e ma(o% "iffe%e!&e )e$*ee! oligopoly a!" mo!opoli$i&
&ompe$i$io!:
"li)opoly and monopolistic competition ha.e some similarities/ but also ha.e a fe'
important differences( Both are e3amples of imperfect competition(
"li)opoly contains a small number of lar)e firms and monopolistic competition contains a
lar)e number of small firms( 2he di.idin) line bet'een oli)opoly and monopolistic
competition can be blurred due to the number of firms in the industry(
"li)opoly is a mar*et structure containin) a small number of relati.ely lar)e firms/ 'ith
si)nificant barriers to entry of other firms( ?onopolistic competition is a mar*et structure
containin) a lar)e number of relati.ely small firms/ 'ith relati.e freedom of entry and e3it(
A comparison bet'een these t'o mar*et structures is offers a little insi)ht into each(
Ma&" o# +e,: 2he primary difference bet'een oli)opoly and monopolistic competition is
the relati.e si1e and the mar*et control of each firm based on the number of competitors in
the mar*et(
Geo!#ap() A#ea: the )eo)raphic si1e of the mar*et is the prime determinant of
mar*et structure( A particular industry mi)ht be monopolistic competition in a lar)e city/ but
oli)opoly in a smaller to'n(
-e%al sales offe# a& example: #ar)er cities usually ha.e hundreds/ e.en thousands/ of
shoppin) alternati.es/ includin) discount super centers/ mom0and0pop stores/ shoppin) malls/
and nation0'ide chains( Such a mar*et is monopolistic competition( Smaller to'ns/ ho'e.er/
tend to ha.e fe'er stores/ perhaps a sin)le super center or shoppin) mall and a handful of
stores located in a small do'nto'n area( Such a mar*et is oli)opoly(
Ba##e#s %o E&%#": A *ey difference bet'een oli)opoly and monopolistic competition is
barriers to entry( "li)opoly barriers are hi)h( ?onopolistic competition barriers are lo'(
:o'e.er/ entry barriers are a matter of de)ree( 2he need for )o.ernment authori1ation is one
entry barrier that can create oli)opoly/ especially if entry is limited to only a fe' firms(
:o'e.er/ it can also create monopolistic competition if a lar)er number are allo'ed entry(
"ther barriers/ such as start0up cost and resource o'nership/ also limit entry to different
de)rees/ leadin) to either oli)opoly or monopolistic competition( ?oreo.er/ these entry
barriers can chan)e o.er time/ transformin) oli)opoly into monopolistic competition or .ice
.ersa(
.(e ma/o# 'ffe#e&)e 0e%,ee& ol!opol" a&' mo&opols%) )ompe%%o&: Is the si1e and
number of competin) firms(
( "li)opoly refers to lar)e firms ha.in) small number of competitors 'hile monopolistic
competition is small firms 'ith lar)e number of competitors(
G( "li)opoly has barriers to entry and e3it in the mar*et or industry/ 'hile monopolistic
competition has freedom for entry and e3it of industries(
8nder monopolistic competition/ many sellers offer differentiated productsDproducts that
differ sli)htly but ser.e similar purposes( By ma*in) consumers a'are of product differences/
sellers e3ert some control o.er price(
In an oli)opoly/ a fe' sellers supply a si1able portion of products in the mar*et( 2hey e3ert
some control o.er price/ but because their products are similar/ 'hen one company lo'ers
prices/ the others follo'(
1e%e#m&es of ma#$e% s%#2)%2#e:
?ar*et
structure
No( of seller Nature of the
product
?ar*et share
of seller
;ontrol of
the seller
o.er the price
Entry
and e3it
E3amples
Mo&opols%
)
#ar)e Differentiate Small Some
;ontrol
Not 9ree

Restaurants/ mo.ies

Ol!opol" 9e'
differentiate :omo)eneou
s
#ar)e ?ay or may
not
Depends
on the
?ar*et
9ood/ oil/ SI? ;ard

Exemple of 'ffe#e&)e & mo&opols%) a&' olo!opol" :
?onopolistic0 ;lothin) industries +all ma*in) shoes/ but each shoe is different dependin) on
the company, H B; of their mar*et po'er +some,/ they are N"2 price ta*ers(
"li)opoly0 $as industries +most )as stations 'ill ha.e about the same price per )allon, H A
say in price but most 'ill be about the same(