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Price determination under Oligopoly

Price determination under Oligopoly

Price determination under Oligopoly

Price determination under oligopoly may be one of the three following types:

  • Independent pricing.
  • Oligopoly pricing under collusion.
  • Oligopoly pricing under price leadership.
  1. Independent Pricing:

    If we assume that each firm is following an independent price and output, then it does not take into account the reaction of other producers. This can happen when the firm is producing differentiated product. In this case a producer can set prices independently. But generally firms accept the prevailing price for its product because the firm cannot charge the arbitrarily fixed high price in the presence of other sellers in the market. These sellers will not reduce the price for their products. Hence, according to modern writers independent price setting cannot exist for the longer period in oligopoly. It leads to a sense of antagonism, uncertainty and insecurity and to overcome them there is a tendency among oligopoly firms to come together by express or tacit collusion. Thus independent price setting by leading to uncertainties and insecurity paves the way for price leadership or outright collusion among the oligopoly firms.

  2. Oligopoly Pricing Under Collusion:

    In economics if competitors co-operate in pricing their products, they are said to engage in collusion.

The following are some of the forms of collusion:

  • Traditional usage: If firms are following a set pattern of conduct for a long period of time, they permit the competitors or expect continued adherence to the same pattern.
  • Announcement by trade associations of which the sellers are members and whose declarations they approve explicitly or through compliance which involve only “understanding”.
  • Collusion based on agreement: There are many varieties of agreement such as the gentlemen’s agreements and written agreements.

Now we shall discuss a case of perfect collusion under perfect collusion, price and output of the industry and each firm’s share is determined solely by cartel administration in this way all firms can maximise profits jointly 3. Oligopoly pricing under price Leadership: Price leadership is the position when firms fix their in a way dependent on the price charged by one of the firms in the industry that firm which announces price changes is the price leader others are known as price followers.

This is the case in the nature and stable industries giving standard products like cement, oil steel. There is also product differentiation.

The Price leader is a leader in all markets. It is, also seen in some markets the firms will follow while at others it will lead the price leadership shift among major firms generally a single firm continues to be the price leader.

Why does Price leadership arise?

There is no explicit agreement but it rules. Price leadership arises due to following circumstances

  1. Reputation:

    Reputation for sound pricing decision based on better information and more experienced judgement than what the other concerns have. It grows with natural growth in the industry with successful price history good management and long experience in marketing matters of the price leaders. Other firms accept his leadership because of his ability to co-ordinate industrial growth with that of its members.

  2. Substantial share of the market:

    The largest firm becomes the leader as it wields greater power and informed of the industry demand and supply conditions and hence determines price policy.

  3. Initiative:

    Company that first develops a product or it retains the price leadership whether or not it retains the large market.

  4. Aggressive pricing:

    Accompany may take leadership through lower prices and hence take large and profitable market from conservative rivals.

Characteristic/Features of Price Leadership

  1. Due to continued changes in prices the risk of undermining the following loyalty and an appearance of vacillation by the leader, a price leader aim at making few but large and dramatic price charges.
  2. The price leader leads only in price rises but at reductions. He becomes a follower. In most of the industries, followers take their risk in bringing down the prices and leaders follows at the fall.
  3. Price leader may give timely concessions from the official price as frequently changes upset the followers while risks the prestige of the leader the leader should change the price while the changes in cost and demand conditions are permanent.
  4. Price leader forecasts demand and cost conditions to play his role effectively, accurately and in conformity with the confidence of the followers.
  5. In case of significant difference in quality service and reputation in an industry. The price leader operates in the upper quality start with a rich mixture of service and charges some price premium for his superiority.

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