explain how price is determined under oligopoly?

Answer 1

in non-collusive oligopoly the leader determines the price maximising profit with respect to the follower's reaction function.

Answer 2

Depends on the product and governmental restrictions.

OPEC is an example of supply chain oligopoly where the supplying countries define the pricing based on the supply in the chain. They restrict production to bump the price up.. http://en.wikipedia.org/wiki/Oligopoly

Answer 3

Even when there is no competition among sellers, either because there is only one or because all sellers operate as aunit, there is still competition for a buyer's money among the seller of this product and sellers of all other products for which the buyer may wish to acquire. If the producer of milk has zero competition from other sellers of milk, the sole producer can not charge $100.00 per bottle and make any sales to me. He might sell a few pints to the very rich, but would find most of his milk curdling. He has to reduce the price to increase sales. Eventually a price is reached where he optimizes his income because a higher price would reduce sales more than the additional price would yield; while reducing the price would increase sales but lower the income in total because of reduced price per bottle.

Answer 4

oligopolies are price makers i.e they set their own prices.

Answer 5

I had asked this same question 3 times, and not gotten an answer

Answer 6

It's really good

Answer 7

An oligopoly is a market situation in which a small number of selling firms control the market supply of a particular good or service and are therefore able to control the market price. An oligopoly can be perfect-where all firms produce an identical good or service (cement)-or imperfect-where each firm's product has a different identity but is essentially similar to the others (cigarettes). Because each firm in an oligopoly knows its share of the total market for the product or service it produces, and because any change in price or change in market share by one firm is reflected in the sales of the others, there tends to be a high degree of interdependence among firms; each firm must make its price and output decisions with regard to the responses of the other firms in the oligopoly, so that oligopoly prices, once established, are rigid. This encourages non-price competition, through advertising, packaging, and service – a generally nonproductive form of resource allocation. Two examples of oligopoly in the Nigeria are airlines serving the same routes and tobacco companies.
This means that oligopoly is an intermediate market structure between the extremes of perfect competition and monopoly. Oligopoly firms might compete (non-cooperative oligopoly) or cooperate (cooperative oligopoly) in the marketplace. Whereas firms in an oligopoly are price makers, their control over the price is determined by the level of coordination among them. The distinguishing characteristic of an oligopoly is that there are a few mutually interdependent firms that produce either identical products (homogeneous oligopoly) or heterogeneous products (differentiated oligopoly). Mutual interdependence means that firms realize the effects of their actions (in terms of price and output determination) on rivals and the reactions such actions are likely to elicit. For instance, a mutually interdependent firm realizes that its price drops are more likely to be matched by rivals than its price increases. This implies that an oligopolist, especially in the case of a homogeneous oligopoly, will try to maintain current prices, since price changes in either direction can be harmful, or at least non-beneficial. Consequently, there is a kink in the demand curve because there are asymmetric responses to a firm's price increases and to its price decreases; that is, rivals match price falls but not price increases. This leads to "sticky prices," such that prices in an oligopoly turn out to be more stable than those in monopoly or in competition; that is, they do not change every time costs change. On the flip side, the sticky-price explanation (formally, the kinked demand model of oligopoly) has the significant drawback of not doing a very good job of explaining how the initial price, which eventually turns out to be sticky, is arrived at. Airline markets and automobile markets are prime examples of oligopolies. We see that as the new auto model year gets under way in the fall, one car manufacturer's reduced financing rates are quickly matched by the other firms because of recognized mutual interdependence. Airlines also match rivals' fares on competing routes. In oligopolies, entry of new firms is difficult because of entry barriers. These entry barriers may be structural (natural), such as economies of scale, or artificial, such as limited licenses issued by government. Firms in an oligopoly, known as oligopolists, choose prices and output to maximize profits. However, firms could compete along other dimensions as well, such as advertising, location, research and development (R&D) and so forth. For instance, a firm's research or advertising strategies are influenced by what its rivals are doing. When one restaurant advertises that it will accept rivals' coupons, others are compelled to follow suit. The rivals' responses in an oligopoly can be modeled in the form of reaction functions. Sophisticated firms anticipating rivals' behavior might appear to act in concert (conscious parallelism) without any explicit agreement to do so. Such instances pose problems for antitrust regulators. Mutually interdependent firms have a tendency to form cartels, enabling them to coordinate price and quantity actions to increase profits. Besides facing legal obstacles, cartels are difficult to sustain because of free-rider problems. Shared monopolies are extreme cases of cartels that include all the firms in the industry. Given that mutual interdependence can exist along many dimensions, there is no single model of price determination under oligopoly. Rather, there are numerous models based on different behavior, ranging from the naive Cournot models to more sophisticated models of game theory. An equilibrium concept that incorporates mutual interdependence was proposed by John Nash and is referred to as Nash equilibrium. In a Nash equilibrium, firms' decisions (i.e., price-quantity choices) are their best responses, given what their rivals are doing. For example, Shagaliku's charges N30 for a Value Meal based on what Austin and THLIZA's are charging for a similar menu item. Shagainku's would reconsider its pricing if its rivals were to change their prices. The level of information that firms have has a major influence on their behavior in an oligopoly. For instance, when mutually interdependent firms have asymmetric information and are unable to make credible commitments regarding their behavior, a "prisoner's dilemma" type of situation arises where the Nash equilibrium might include choices that are suboptimal. For instance, individual firms in a cartel have an incentive to cheat on the previously agreed-upon price-output levels. Since cartel members have nonbinding commitments on limiting production levels and maintaining prices, this results in widespread cheating, which in turn leads to an eventual breakdown of the cartel. Therefore, while all firms in the cartel could benefit by cooperating, lack of credible commitments results in cheating being a Nash equilibrium strategy—a strategy that is suboptimal from the individual firm's standpoint. Models of oligopoly could be static or dynamic depending upon whether firms take inter-temporal decisions into account. Significant models of oligopoly include Cournot, Bertrand, and Stackelberg. Cournot oligopoly is the simplest model of oligopoly in that firms are assumed to be naive when they think that their actions will not generate any reaction from the rivals. In other words, according to the Cournot model, rival firms choose not to alter their production levels when one firm chooses a different output level. Cournot thus focuses on quantity competition rather than price competition. While the naive behavior suggested by Cournot might seem plausible in a static setting, it is hard to image/imaging real-world firms not learning from their mistakes over time. The Bertrand model's significant difference from the Cournot model is that it assumes that firms choose (set) prices rather than quantities. The Stackelberg model deals with the scenario in which there is a leader firm in the market whose actions are imitated by a number of follower firms. The leader is sophisticated in terms of taking into account rivals' reactions, while the followers are naïve, as in the Cournot model. The leader might emerge in a market because of a number of factors, such as historical precedence, size, reputation, innovation, information, and so forth. Examples of Stackelberg leadership include markets where one dominant firm dictates the terms, usually through price leadership. Under price leadership, the leader firm's pricing decisions are consistently followed by rival firms. Since oligopolies come in various forms, the performance of such markets also varies a great deal. In general, the oligopoly price is below the monopoly price but above the competitive price. The oligopoly output, in turn, is larger than that of a monopolist but falls short of what a competitive market would supply. Some oligopoly markets are competitive, leading to few welfare distortions, while other oligopolies are monopolistic, resulting in dead weight losses. Furthermore, some oligopolies are more innovative than others. Whereas the price-quantity rankings of oligopoly vis-à-vis other markets are relatively well established, how oligopoly fares with regard to R and D and advertising is less clear.