Original subtitles

hi everybody let's in this video look at

oligopoly in detail focusing on the

Kingdom man curve model of studying

oligopoly we're gonna look at it in the

same way as always we're gonna start

with characteristics were then gonna go

to a king demand curve diagram then

we're gonna look at the conclusions that

we can take from this this is part one

of our oligopoly study we can also use

game theory to map oligopoly behavior

that's going to be the next video so

stay tuned for that after this let's go

straight into the characteristics that

define oligopoly a very very realistic

market structure here well Oleg means

few so we can say that there are a few

firms that dominate the market being

more precise than that we can say that

there is a high concentration ratio what

does that mean well we normally say as

economists no more than seven firms with

collectively around 70% market share

that's kind of how we define an

oligopoly these firms will have

differentiated goods unique goods which

means that they are price makers here we

say there are high barriers to entry and

exit an oligopolistic markets the major

barriers to entry startup costs

economies of scale sunk costs brand

loyalty they tend to be quite strong we

say that in oligopolistic markets there

is interdependence this is a defining

feature of an oligopoly market along

with number one probably the most

important characteristic here what is

interdependence interdependence means

that firms don't make decisions on their

own independently no they make their

choices they make decisions based on the

actions and all the reactions of rival

firms so their owners made decisions

independently on their own they think

about what their rivals are going to do

they think about rival firms first and

then make decisions

so that's interdependence firms make

decisions based on the actions and or

reactions of rival firms very important

characteristic and because of that we

often see price rigidity we're going to

study how in a second using the kingdom

anchor model so if there isn't much

competition on price prices tend to be

sticky or rigid we see a lot of

non-price competition therefore

competition based on branding

advertising quality of product quality

of service that kind of

and also because of interdependence

profit maximization is not necessarily

here the sole objective of firms firms

don't make decisions independently they

always think about what their rivals are

doing what their rivals are going to do

and if you think about oligopoly as a

dog fight a dog fight for market share

firms are very close to having control

over the market monopoly power in the

market and therefore anything that they

can do that's going to give them that

power they are going to do if that means

profit maximization is the best then by

all means but if it means a different

objective is better then they'll pursue

that so it makes knowing the objective

very difficult in truth we don't know

what the objective of firms are in

oligopoly

therefore we say that profit max is not

always the sole objective you think that

this is a dogfight for market share

whatever objective allows the firm to

get there is what the objective a firm

is going to be so understanding these

characteristics can we look at any

real-life examples yeah there are some

really good ones let's look at global

oligopoly examples and we can take the

global soft drink industry absolutely a

duopoly between coca-cola and Pepsi the

global car industry is a good example

OPEC is a legal oligopoly very good

example right the Petroleum Exporting

Countries here OPEC but we take the UK

there are some great examples of the UK

oligopoly the UK supermarket industry

the UK energy industry the UK

supermarket fuel providers a UK bus

market UK airline market whether a short

haul or long-haul Airlines some

brilliant examples of oligopoly and the

characteristics will fit here but can we

map oligopoly behavior due to

independence it's very difficult but one

tool to help us is the Kingdom and curve

model here what can we learn from this

the king demand curve can nicely

illustrate interdependence and can lead

us to our conclusion of price rigidity

in two ways the first way to use king

demand curve is to understand that firms

don't want to change their price let's

understand how here so the price in the

market is currently at p1 it is settled

there and the theory goes that around p1

there are differing elasticity's of

demand we can see that above p1 there is

a price elastic demand curve

and we can see that below p1 there is a

price inelastic demand curve differing

price elasticities of demand around the

price in the market of p1 therefore ax

makes no sense for a firm to change

their price let's take an example and

say if firm raises their price from p1

to p2 we can see here that quantity

demanded is going to decrease

but decrease proportionately more than

the increase in price why is that as a

firm moves on to the price elastic part

of the demand curve

that's because of interdependence other

firms will not follow this price rise

looking to gain market share other firms

are going to keep that price at p1 and

undercut this firm so the firm has

raised their price is going to suffer

all the other firms in the market will

keep their price at p1 the man is gonna

drop off significantly and as a result

market share is gonna decrease total

revenue is going to decrease for this

firm what a stupid decision when

oligopoly is all about a dogfight for

market share so raising price above p1

makes absolutely no sense because of

interdependence and how other firms will

react what about reducing price let's

say this firm goes for a big decrease in

price from p1 to p3 here big decrease in

price well we can see because of the law

of demand demand is going to increase

from q1 to q3 but proportionately less

than the reduction in price and that's

clear to see here as this firm now moves

on to the price inelastic portion of the

demand curve why is that why is the

proportional increase in quantity

demanded going to be less than the fall

in price well that's because of other

firms and how they're going to react

other firms are going to follow looking

to protect their market share they're

going to follow and get into a price war

with this firm as a result of that total

revenue is going to decrease

remember if we reduce price and demand

as price inelastic total revenue is

going to fall and net overtime there is

going to be no change in market share so

even a price reduction is not in the

best interest of the firm as they move

on to the price inelastic portion of the

demand curve here so it's clear from the

very basic kingdom--and curve model that

firms don't want to change their price

raising price they'll lose market share

and reducing price they won't gain

anymore

you've shown the long run they're going

to lose revenue in both cases here so

changing price altering price from p1

makes no sense for the firm because of

interdependence therefore there is an

argument a price rigidity in oligopoly

but there is another way we can use

Kingdom and cope we can enhance him

understand why firms don't need to

change their price and that comes from

drawing the marginal revenue curve the

marginal revenue curve is going to look

something like this remember mr is

always twice as steep as a are so twice

as steep there but then it's going to

possess a vertical gap before being

twice as steep as the second part of the

AR curve join everything together we

have an mr curve that looks like that

you don't need to understand why the mr

curve has got a vertical gap in it but

if you want to know just click on this

link I've explained it why there is a

vertical gap when we draw the mr curve

in the kingdom anchor model you can

understand it there but that's what it

looks like the mr curve with a vertical

gap in it and the idea is that if costs

change within this gap so let's say

costs increase we're going to draw

marginal cost

mc1 and cost to increase to MC - the

idea is as long as costs change within

this vertical gap if the oligopolist is

a profit maximize their producing where

MC equals mr in any case they are going

to be charging a price of p1 and

understand that by looking at this

diagram so if the oligopolist is a

profit maximizer producing where MC

equals mr in both cases MC equals mr is

going to give us a quantity here at q1

remembering that we read the price of

the AR curve as long as quantities at q1

the price is always going to be reading

off the AR curve p1 so we can understand

that because there is a vertical gap in

the mr curve here as long as costs

change within this vertical gap a profit

maximizing oligopolist producing where

MC equals mr will always charge a price

of p1 IE firms don't need to change

their price potentially if costs were to

change within this vertical gap this is

a very theoretical idea but you can see

how we can extend the kingdom anchor

model to give us a second reason behind

price rigidity that's fantastic now

let's understand sum up all the

conclusions we can get from the kingdom

anchor model conclusion number one is

that even though it doesn't make any

sense for a firm to do so that could

well be price competition in an

oligopoly market we've said that raising

price or reducing price doesn't make

sense but first may still try and reduce

price in order to gain market share to

out-compete rivals known as a price war

so even though we said it doesn't make

sense it doesn't mean out there in the

real world firms don't give it a go we

look at a supermarket providers in the

UK is a good example you see a lot of

price wars and price competition there

and also short haul airlines in the UK

competition is based around reducing

price and price wars but the second

conclusion which is probably more

logical here is that we'll see a lot of

non-price competition if we agree that

prices tend to stay sticky and rigid at

p1 it makes sense for there to be more

than non-price competition like we see

with the global soft drink industry as

an example competition on branding

advertising and quality absolutely but

also we can see here that

interdependence is annoying right

interdependence is frustrating it means

you can't see much price competition it

means firms are always kind of looking

at what their rivals are doing how their

rivals are going to react etc and that's

frustrating so there is a very strong

temptation in oligopoly to break into

the pendants and to collude together not

have to worry about how rivals are going

to react I'm worrying about what to do

with your price if you're colluding you

can act like a monopoly fix prices and

make very high profit so there is that

very strong temptation as well to ditch

into dependence collude and fixed prices

are made very high profits this is only

half the story we need to also

understand how we can use game theory to

map oligopoly behavior stay tuned for

that video next thanks for watching guys

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