Oligopolya situation in which a particular market is controlled by a small group of firms. Oligopoly: a situation in which a particular market is controlled by a small group of firms. Homogeneous product oligopoly: intermediate goods used by different industries to manufacture goods Homogeneous product oligopoly: intermediate goods used by different industries to manufacture goods (eg steel, aluminium). Differentiated product oligopoly: Differentiated product oligopoly: goods for personal consumption. (eg computers, cars)

1. Few big firms 1. Few big firms dominate the market differentiated products 2. Producers differentiated products as much as possible (though still substitutes)

3. Barriers to entry and exit exist 3. Barriers to entry and exit exist from complete to free non-price competition access to raw materials Licences (SA cell phone industry – gov only granted 3 licences) 4. Incomplete information Each firm tries to prevent other firms in the industry from getting knowledge of its production processes, new products, R&D 5. Interdependence exists firms consider rivals’ reactions while adjusting prices and outputs. 6. Collusion Formal/informal agreement between firms to divide the market, set prices or limit production. Act as a monopoly to restrict output.

Price Quantity D = elastic D = Inelastic R5 100 Kinked D Curve The principle of the kinked demand curve rests on the principle that… raises its price will not follow suit If a firm raises its price, its rivals will not follow suit lowers its pricerivals will all do the same If a firm lowers its price, its rivals will all do the same The principle of the kinked demand curve rests on the principle that… raises its price will not follow suit If a firm raises its price, its rivals will not follow suit lowers its pricerivals will all do the same If a firm lowers its price, its rivals will all do the same Assume the firm is charging a price of R5 and producing an output of 100. above R5 If they charge above R5 rivals would not follow suit. elastic demand (substitutes available) revenue will decrease Assume the firm is charging a price of R5 and producing an output of 100. above R5 If they charge above R5 rivals would not follow suit. elastic demand (substitutes available) revenue will decrease Original Revenue New Revenue If they lower price, rivals will follow suit. % change Q < % reduction in P inelastic demand curve revenue will decrease If they lower price, rivals will follow suit. % change Q < % reduction in P inelastic demand curve revenue will decrease New Revenue Original Revenue The firm faces a ‘kinked demand curve’ forcing stable pricing structure. May be overcome by non-price competition. kinked demand curve 7. Firms have a kinked demand curve – prices remain fairly stable

8. Non-price competition Price wars uncommon as everyone loses out Non-price competition includes… a) Product differentiation

b) Productdiversification/proliferation b) Product diversification/proliferation Unilever own ALL of these brands!

c) Advertising d) Packaging