welcome back to our discussion on oligopoly uh we in the previous module we took an example
and we saw what are the different outcomes if the firms behave in different ways so if
the firm behaved like a perfectly competitive uh firm they would be earning zero profit
then we went on to see what would be the monopoly output in case of a uh situation where we
have the demand schedule we have the cost and we have the profits and we clearly saw
what the monopoly outcome was and uh we discussed why it is difficult for oligopoly firms to
settle at the monopoly output and monopoly price in a uh oligopolistic market
when there are more than one firms there each firm acting on its own self interest they
end up producing more output than the monopoly output so this is what we saw in the earlier
uh module and this is a very short module where we are going to just extend that discussion
and see compare the different outputs . so so uh oligopoly equilibrium is the market
outcome in case of oligopoly is called a nash equilibrium where economic participants interacting
with one another each choose their best strategy given the strategies that all the others have
chosen so the market equilibrium in case of so as we saw in the earlier example we took
the earlier example and in the earlier example we saw that the firms do not settle at the
monopoly outcome although the monopoly outcome gives them the higher level of profit or the
highest level of profit they do not uh stick to the monopoly outcome and what they do is
they move on to produce more output ending up at a market equilibrium where from where
they do not have any incentive to move away from
so they end up each of the firms ended up producing 40 units of output instead of 30
units of output and each of the firms ended up getting a profit of rupees 800 against
the monopoly out profit level of rupees 900 for each of the firms had they stuck to the
monopoly output of uh total 60 units and 30 units by each of the firms
so this situation or this outcome this equilibrium is called a nash equilibrium where uh the
participants basically when they interact with each other they know that each of the
firms they know what the rival is probably going to do or what the rival is going to
do and accordingly they change their decision output uh producing decision like in the example
that we took earlier each of the firms although they agree amongst
themselves that each of us is going to produce 30 units yet each of the firms once they know
that the other firm is going to produce 30 units its best for them to produce 40 units
and secondly worse is if the firm distrust the rival or distrust the other firm and thinks
that the other firm is going to break the agreement then also it makes sense for this
firm to change its output level from 30 to 40 units
so given the situation or given the strategy that has been chosen by the uh by its rival
it is in the best interest of the firm to produce 40 units hence production or output
of 40 units by each of the firms in the in our example was a Nash equilibrium and neither
of the firms is going to move away from that output level of 40 units
so this is called nash equilibrium where economic participants interact with one another and
they choose their best strategy given the strategies that all the others have chosen
. so from our discussion so far we know that
the market outcomes are such that uh competitive outcome we already saw in our example if you
have uh if you have taken down the examples uh if you remember the so im just going to
write the so we had a price series here a output series
here the first point was 0 140 0 1400 and minus 1400 so then we had then 10 120 1200
1200 and 0 then 30 80 2400 800 and 1600 and 40 60 2400 600 and 1800
so so i have not filled up the other figures
but these are just for interest and we saw this was the perfect competition this was
the perfectly competitive outcome our oligopolistic outcome came out to be here this was oligopoly
and the final one this one was so this one was monopoly price this one was oligopoly
outcome and this was perfectly competitive outcome
so uh as we see here the output is output in case of competition is highest 120 is more
than 80 which is the oligopoly outcome and monopoly outcome is output is 60 which is
lowest and the price is just the reverse and similarly in case of profit also competitive
profit is 0 oligopoly profit is 1600 and monopoly profit is 1800
so these are the situations which uh so these are the differences in outcome between different
when the firms behave as a (compet) as competitive firms or monopoly firms or uh oligopoly firms
. so price in case of competition is lowest
in case of oligopoly is slightly higher and in case of monopoly it is highest Now just
why why does that happen so so it is basically what we mean here is in each of these firms
or each of these market structures of competition oligopoly and monopoly the difference is very
broadly speaking the difference is in the number of sellers who are operating in the
market so the number of sellers who can actually
be present in the market that is that is a uh that that results from the nature of the
output that is being produced in these kinds of markets which we discussed initially when
we talked about market structure but finally what price to charge and what output to produce
that basically comes from the interaction between all these firms in the market
so higher the number of firms there is more competition in the market and price is lower
and output is higher and profit is lower so that is where it boils down to at the end
of the day so that is where it boils down to and although we have theoretically developed
various models of competition monopoly monopolistic competition and oligopoly and we have tried
to uh make distinctions between the different kinds of uh market structures and hence develop
theoretical models We have drawn diagrams with demand curve marginal cost etc and seen
what the firms uh equilibrium output is going to be
but in reality in the real world there is the the demarcation between the market structure
for different firms is quite grey it is not in black and white that one firm is really
a oligopolistic firm or is it a monopolistic competition or even if there are few firms
more than one firm in the market yet they can behave like a monopoly so all these sorts
of situations are possible in a market so finally it all boils down to how many firms
are operating in the market and how they can uh decide their strategy what is possible
for them to do and what is not possible for them to do
so uh so to look at the outcomes in a different way lets look at look back at the 2 effects
of increasing output if you may remember when we had uh introduced the negatively sloping
demand curve in case of monopoly if you remember in case of perfect competition the demand
curve facing the firm is horizontal so the firm knows that it can sell as many units
of output as possible at that given price but in case of the monopoly and monopolistic
competition and any firm which had some amount of market power was facing a negatively sloping
demand curve and when we introduced the negatively sloping demand curve we discussed about the
2 effects we said there was this uh output effect and there was this price effect so
let me uh lets see what they were so looking back at the 2 effects of increasing
output one was the output effect that is if price is more than marginal cost raising output
raises profit price effect was raising output reduces prices and hence profits so if output
effect is more than price effect output will be increased and vice versa .
so basically going back to the price effect and output effect if you may if you remember
we discussed that when uh the a firm facing a negatively sloping demand curve or a firm
facing a negatively sloping demand curve and if this is the so for a firm facing a negatively
sloping demand curve if the firm increases output there are 2 effects
one is the increase in output from q 0 to q 1 which raises the total revenue by increasing
the q component here but at the same time when the q component increases price falls
to p 1 so price falls to p 1 so tr when p when q increases there is a increasing impact
on tr because of q rising and as q rises p falls to p 1 and hence there is a downward
impact on revenue and hence profit also so both these effects work in work together
so there is a output effect and there is a price effect in what situation is output going
to be increased now output is going to be increased if the output effect is stronger
than the price effect so output will be increased or the firm it would be the interest of the
firm to raise the output if this effect is more than this effect so if the output increase
effect is more then it makes sense for the firm to raise the output
so keeping that in mind in what situation do the firms actually increase the output
so as the number of firms in a market increases price effect becomes smaller so as the number
of firms in a market increases price effect becomes smaller and hence p approaches marginal
cost as more and more firms enter the market so the output effect becomes stronger so it
makes sense for the firms to increase so as more and more uh firms enter the market the
output the amount of output goes up and it makes sense for the firms to increase output
and price gradually approaches marginal cost so when that happens as price moves more and
more towards marginal cost and output keeps on increasing because more firms have entered
the market oligopoly looks more like a competitive market so oligopoly then starts looking like
a competitive market so output increases towards competitive level so when uh when more and
more firms enter the market then the output becomes bigger and bigger and price comes
closer and closer to marginal cost and hence uh hence the oligopoly market outcome looks
moves more towards uh competitive outcome so uh so that is what happens and so so another
another way of thinking about it is uh imagine that there were instead of 2 firms there were
3 firms if there were 3 firms you would see that if you uh you could do it as a exercise
actually that instead of 2 firms had there been 3 firms what would they do in that case
if had there been 3 firms so the monopoly output would be 1800 and they would be splitting
it up amongst themselves so they would be producing 20 units each
so you can keep on increasing the number of units and each firm when they break the promise
and they increase the output they end up producing output which is more more than 80 units so
as more and more firms enter this market this quantity is going to move say when it when
from instead of 1 firm when there are 2 firms there is 80 units
as they move as more and more firms enter the market this output keeps on increasing
and in the extreme situation if there are whole lot of firms in the market they might
end up producing almost close to close to this level of output so that is the intuition
behind it and that is the intuition behind it that uh in case of a oligopolistic market
framework as more and more firms enter the market the divide between oligopoly and uh
monopoly uh that becomes broader wider and oligopoly market starts looking more and more
like a competitive market now this is this outcome could be uh compared
or this outcome could be uh compared to the case of trade between countries to the benefits
of trade between countries how so Uh say for example there is a closed economy there is
a closed economy which has only a few manufacturers Lets lets uh take the example of the uh car
manufacturing industry so lets take the example of cars and say uh there is say each of the
country say taking the example of say us now imagine that us has only 2 firms which
manufacture cars one is the ford other is the general uh general motors motors now ford
and gm they together so they form a duopoly within the market setup in the US and they
are catering to all the car requirements of the country in that case they will end up
somewhere here theyll end up producing number of cars which is which is similar to or commensurate
with this kind of outcomes slightly more than monopoly but less than competitive output
again say japan japan has 2 2 car manufacturers of its own say toyota and honda so they also
in their country if they are not allowed to trade if japan is does not trade they also
end up with only 2 firms within their country and uh they also produce less amount of output
and uh again say germany has bmw and mercedes and they do not trade with any other country
now instead imagine that now the these countries open up so each of these country say us now
has instead of 2 car manufacturing companies they now have 6 car manufacturing companies
so they now have 2 of their own they have 2 japanese companies and 2 german companies
who manufacture cars for their domestic market so as soon as the oligopoly market becomes
bigger with instead of 2 firms they now have 6 firms in the market and uh they again they
behave like a oligopoly and they are going to behave and make their decisions exactly
like this and they will also not be probably be able to collude and they are not going
to settle at this equilibrium but they will end up producing instead of this equilibrium
their output will be bigger because each of the firm defaults on the agreement and each
of the firm ends up producing more so the net result is the total output in the
market goes up many folds as the total output in the market goes up many folds price approaches
this competitive price and output approaches this competitive output it may not be uh reaching
the competitive price and output is unrealistic but at least it will be close it will be much
away from the monopoly equilibrium and it will be closer to competitive equilibrium
so hence we see from these illustrations why it is important for a market to have a large
number of firms Why it is important for the government to see to it that there are no
artificial entry restrictions or entry barriers for different companies so to create a competitive
setup a competitive environment in any market is desirable because as the market becomes
larger and larger with large number of producers the final outcomes comes closer and closer
to the competitive outcome which is the most efficient and which has the highest amount
of welfare maximization possible in a economy so as you have more and more firms entering
the market price goes down for the customers for the consumers and quantity goes up for
the consumers so they have a whole lot of choices uh available in the market so hence
market outcome in case of a market outcome a perfectly competitive outcome perfectly
is something perfectly competitive although is unrealistic but at least competitive outcome
is something which the markets and the government needs to need to strive for because of the
betterment of uh consumption for all the consumers and it improves competition and it improves
efficiency of production also because as price gets closer and closer to marginal cost the
cost of producing the last unit of output becomes closer and closer to the price that
the consumers are willing to pay for that unit of output which is a efficient outcome
so uh so that that that is a discussion about the comparison between oligopoly and other
kinds of market structures and finally we have seen how the different uh market structures
are very similar to each other the only difference being the change in the
number of uh producers operating in the market and in the following module we are going to
discuss about game theory because so far in case of oligopoly we have said that it is
more about strategy of the firms deciding uh how to act depending on how the rivals
are going to respond so we are going to try to understand the decision making process
of different firms through game theory in our next module thank you