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 [Music]