 There is entry barrier to the oligopoly market and what are the entry barrier? Huge investment requirement is there. So, someone should have the capacity for huge investment if someone is trying to enter into the market because they have to compete on the basis of product, they have to compete on the basis of the price. Strong consumer loyalty for the existing brands like there are many firms, but why only two firms, they have the maximum market share because the maximum market share is because there is a strong consumer loyalty for those two firms and that is a reason strong consumer loyalty for existing brands generally poses as the entry for the other firms to enter enter in the market and operate in the market. Then economies of scale like we are saying that there should be at least few large seller and when there are few large seller obviously with their scale of operation they have already achieved the economies of scale. So, when someone enter into the market, someone operate in the market they have to compete with them with a high cost of production and which itself create a entry for the entry barrier for the other firms to enter because they know that if they are entering in that market they have to compete with a high cost of production. So, there is interdependent decision making as we discussed in the previous case the price and output whether it is advertising budget, whether it is about the business policy, the firms they are dependent on each other whether it is a collusion or whether it is a non-collusion. Also there is a evidence of a non-priced competition generally the oligopoly firms avoid price war because it will not benefit the firms it only benefit the consumer. And there is to other strategy like highly aggressive advertisement, product bundling influencing the value perception of the consumer branding offering better service package and generally these are the strategy to get a good amount of sale rather than competing on the basis of price. So, graphically we will see how this price war is not leading a benefit to the producer rather it is leading a benefit to the consumer and that is the reason if you look at the oligopoly firm they avoid that competing each other in term of price rather they compete with each other on the basis of the other strategy like capturing the consumer segment understanding their value perception or may be creating a brand loyalty for them or the additional or the supplementary services along with the product. Now, why there is a non-priced competition so if you consider this as the market share of A and this is market share of B. Suppose this will consider as the price of A here we consider the price of B here A and B there are two firms and we will see why they will not get into the non-priced competition. Suppose initially the price is P 1 now B will always feel that this is the price P 1 to start with B will always feel that if I lower the price I will get a good market share and since they are interdependent on each other since B has lower the price A has lower the price and gain a market share now B will follow that and also B will reduce the price in order to increase the market share. Now, again what will be the reaction of A knowing that B has already reduced the price to get the market share also A will reduce again and reduce the price in order to get the market share what will be the reaction of B A has already reduced again to gain the market share B will also reduce this will continue again this will continue by B this is the price P 2 now at this point the firms A and B they will feel that if they are going beyond this it is now it is nowhere getting profit for them rather they are going to make loss and at this point they will feel that they are not going to reduce the price below P 2 and P 2 will be generally as stabilized at this point at least the stabilized price of it and if you are going beyond this any of the firm they are going beyond this even if they are increasing the market share they are not getting the profit and since it is a oligopoly firm they can decide their price and output they are not going beyond this P 2 and that is how the non-price competition generally takes place beyond this point because when they are competing into a price war they are competing on the basis of the price the output is not beneficial from the benefit for the producer because the output is there is a reduction in the price from P 1 to P 2 and this is not going to benefit the firms rather this is going to the going to benefit the consumer because of decrease in the price from P 1 to P 2 and that is the reason they will not get into the competition on the basis of price or they will not get into the price war rather they will prefer to resort to the other strategy like aggressive advertisement product bundling capturing the value perception of the consumer influence and branding and offering better service package they will just resort to that. So, generally there is one more form of the non-price competition one is getting into better kind of strategy like aggressive advertising bundling or maybe better service package along with the product but apart from this also there is one more form of non-price competition that is generally known as cartel where they come together firms also tacitly they agree to sell their product in the separate market at the same price. So, generally they share the market and it is generally in the form of cartel because they say cartel is in the form of joint organization joint profit maximization and they will just share the market and they will say that you are going to sell in this market I am going to sell in the other market and two firms they will not get into each other market and that way they generally maximize the profit. So, that is the reason this actually the extreme form of non-price competition sometimes it is not explicit people because sometimes the explicit collision is not legal. So, generally they firms they comes into a agreement they comes into a cartel where they share the market. So, they charge the same price, but both of them they sell in the different market and both of them they maximize the profit. So, the uncertainty on the risk on the rival action on the of your price and output is generally goes with that. Then the one of the interesting characteristic of demand curve we will find out of oligopolist market we will find out there is no determinate demand curve or there is no specific demand curve for the oligopoly firm. Demand is affected by own price advertisement and quality that is one point also it is get affected by the price of the rivals product their quality packaging and promotion. So, that is the reason if you look at there are two kind of demand curve we get it in case of a oligopoly firm one which is highly elastic and second less elastic and different types of reaction by rival firms in response to change in the price. So, generally when you increase the price rivals they will not increase the price, but when one firm decrease the price the other they also decrease the price. So, in this case if you look at we get one inelastic demand curve and another elastic demand curve and that is why there is no specific demand curve for a oligopoly firm because the demand gets change on the basis of you know the firm's own price advertising and product quality and also the rivals price product and the advertising and other technique. So, we will see generally how this two demands curve appear for a firm in case of a oligopoly market structure. So, this is one elastic demand curve and here is one inelastic demand curve and what is the difference between this elastic and inelastic demand curve? In case of elastic demand curve small change in the price consumer they will react to it because of there are number of others and in this case the firms generally prefer to not to increase the price generally to decrease the price and this is the inelastic demand curve here whatever the change in the price the pricing that is generally less response from the consumer and here the firm they will prefer to increase the price. So, depends upon the rival action and reaction we have two set of demand curve one is elastic demand curve and another is the inelastic demand curve and since there are two kinds of demand curve there is no specific determinate demand curve for the oligopoly firm. Now, talk about a special case of oligopoly that is generally known as diopoly and in case of diopoly there are only two players in the market. So, it is a case of special case of oligopoly only two players in the market and generally how the oligopoly firm turns into a diopoly firm during the price war generally the less efficient firm had to exit or the price reached after the price war is so low that new firms do not find market attractive or may be the small firm may not able to survive due to high cost and that is the reason the oligopoly firm leads to into a diopoly firm because if it is an inefficient firm during price war they prefer to exit the market or after the price war the price is so less that they find is difficult to survive in the market and even so high cost of production is not suitable for the small firm and they prefer to leave the market. So, if you look at whatever the oligopolist model we have taken into consideration in maximum cases we have analyzed this with the help of two firms typically not in a oligopoly market rather in a diopoly market. So, diopoly is a special case of oligopoly it is a kind of market structure where there are only two firms and there are two players in the market and they compete on the basis of price on the basis of non-price to survive in the market and to get the market share. The other possibility of diopoly is that there are many small players, but two large players are competing and created a diopoly like situation. So, there may be many small player, but when it comes to the market share there are only two large players they are competing and created a diopoly like a situation. So, if you look at before this Maruti Suzuki came into picture before this Maruti Udyok Limited came or before this joint venture started there were two specific or the significant company in case of a car industry that is premier and Hindustan model. Similarly, when you talk about a CDMA technology there are only two major players one is Tata and Reliance, but still opportunities are many there are many more players is coming into the market and the classic example in this case we take diopoly is the Pepsi and Coca-Cola over the year they are just it they have just made this market is a diopoly market because they are having the maximum market share. Similarly, if you talk about the news paper industry there may be many news paper industry, but when it comes to which one the significant or which one the specific there may be only at we talk about the times in times of India we talk about the telegraph and again it is the region specific in Mumbai may be it is a times of India or DNA may be when it comes to generally it is again times of India is Hindu you go to Delhi may be again it is times of India and some others. So, there are two players generally they take a maximum market share or the largest market share and they turn the oligopoly market into a diopoly market. Now, what happens to the equilibrium price and output? Since, there is a interdependence there is uncertainty about the reaction package patterns of the rivals may be sometimes it follows sometimes it do not follows. So, there is interdependence that leads to uncertainty about the reaction pattern of rivals there are wide variety of reaction pattern can be possible and accordingly for each where each type of reaction pattern we have different variety of model of price and output determination or it may be constructed. So, this reaction pattern goes in this direction what should be the price and output determination if the reaction pattern goes in a different direction what should be the price and output determination. However, the actual solution is therefore, indeterminate unless there is a specification of particular reaction pattern of the rivals. So, there is nothing generic price and output equilibrium price and output case in case of a oligopoly market structure it is all situation specific and the situation is dependent on how the rivals they are reacting to change in the price of the or the change in the output change in the advertising change in the business school of the other firm. So, with each pattern of action and reaction there can be separate price and output determination and each kind of price and output determination we can explain through a model at least few of them. So, what is the common we will start with our discussion in case of a non-collusive oligopoly few models in case of non-collusive oligopoly and what is the common characteristic of a non-collusive oligopoly. The common characteristic of non-collusive oligopoly that they assume certain pattern of reaction of the competitor in each period in each period they assume that this is how the rivals is going to behave with this action and in each period and despite the fact that the expected reaction does not in fact, materialize the firm continue to assume that the initial assumption hold. So, in one period if they assume that reaction it should be like this and if it is not happening also next period still the firm feels that the firm is continuing to assume in the initial assumption about the reaction pattern. To put it in a simple word firms are assumed never learn from past experience which makes their behavior at least nape. So, they know that the reaction sometimes does not match whatever the expected reaction what the firm thought of about the rivals that that do not matches, but still they assume the same pattern of reaction in the next time period also and to put it simply we can say that oligopoly firm they never learn from their past mistake and they acted as a nape and they start it again that this should be the reaction pattern of the rivals. So, we will talk about three different model in case of a non-collusive model and we will start with the Karnot model and whether it is Karnot model whether it is Stackelberg model or whether it is King Demanker model in all these three models we have not taken a case of a oligopoly market structure in general rather we have taken it is a special case of duopoly, but there are only two firms and we will see how the price output determination is done in the this specific scenario under Karnot model under Stackelberg model under King Demanker model. So, what is Karnot model to start with if you look at this Karnot model illustrated a market situation under oligopoly with an example of two firms engage in production in sale of mineral water. So, there are two firms in the market it is a two duopoly firms it is a duopoly market two firms and both the firms they engage in the production and the sale of the mineral water. Each firms own a spring mineral water which is available freely from nature. So, they are into the business of production and sale of mineral water each firm own a spring mineral water which is available free from nature they are not incurring any cost for the spring mineral water. The crocs of this model is a situation in which firms ignore independence and take decision as if they are operating independently in the market. So, there is a correction here that in which firms ignore interdependence not that they both the firm they are related to each other and they behave independently and when they behave independently they end into a situation where they are not they are not getting the maximum profit rather they would have got more profit if they are taking the decision interdependently rather independently. So, we take few assumption to understand this Carnot model of duopoly. Two interdependent sellers selling the homogeneous crude the homogeneous crude is the spring water over here and there are large number of buyers in the market. So, if it is two sellers, but there are large number of buyers in the market identical cost curve or we can say in this case since the mineral spring they are getting it from the nature H free it has a zero cost of production. So, this is a very specific case that we are getting something in zero cost of production, but here this is one of the assumption that each duopoly has a zero cost of production and since they have a zero cost of production ideally they have the identical cost curve. Each duopoly makes an output plant during a period which cannot be revised in that period. So, whatever the output plan for them in that particular period that cannot be revised in that period at least if they want to revise they can do it in the next period, but that period they have to just go ahead with the whatever the output plan. Neither of the duopoly set the price, but each accept the price at which total planned output can be sold. So, they are not the price taker price maker rather than the price taker and they accept the price of each product at which the total plan output can be sold. Each duopolist each firm is aware of the mutual interdependence between their output plans, but each is quite ignorant about the direction and the magnitude of the revision in his rival's plan that would be induced by any given change in his own. So, they know that they are interdependent between each other when it comes to output plan, but they are ignorant about the fact that if he is changing his plan, if one firm is changing his output plan what would be the revision in the rival plan with respect to the change in his plan. So, they are quite ignorant about the direction and the magnitude of the revision of the rival's plan whenever they are doing any change to the plan. So, we will assume that Q 1 and Q 2 output level of two seller whose cost of production is 0. So, total output will be equal to Q which is equal to Q 1 plus Q 2. Demand function or price function is that is equal to A plus B Q where A is greater than 0 and B is less than 0. Now, to find the profit of one that will come in the form of pi 1 will get only P Q 1 because the cost of production is 0. So, whatever the total revenue that has to be the profit. So, P Q 1 is the A plus B Q multiplied by Q 1 that is equal to A plus B Q 1 plus Q 2 multiplied by Q 1 and pi 1 comes as A Q 1 plus B Q 1 square plus B Q 1 Q 2. There will be different combination of this Q 1 and Q 2 from which a fixed level of profit of the first seller can be obtained. You get different combination of this Q 1 and Q 2. The locus of all such combination is called iso profit curve or the profit indifference curve for the first seller. So, locus of all such combination of Q 1 and Q 2 where the fixed level of profit will come that combined link lead to a iso profit curve for the first seller or the first firm or the first geopolitist. For each level of profit there will be one such profit indifference curve for one seller. So, if the profit level is different they will get different iso profit curve for the seller. So, first we find out the price then we find out the revenue then we find out the profit function. From the profit function we get the level of profit by taking different combination of Q 1 and Q 2 and the combination of Q 1 and Q 2 which will give the fixed level of profit to the seller that is generally known as the iso profit curve. And for different level of profit we will get a different level of iso profit curve. To maximize this profit 1 we will take the first order derivative of the profit function that is del pi 1 by del Q 1 has to be equal to 0. So, that is A plus 2 B Q 1 plus B Q 2 is equal to 0. Simplifying this B Q 2 is equal to minus 2 B Q 1 minus A or Q 2 is equal to minus 2 Q 1 minus A minus A by B and this is generally known as the reaction curve function for the first seller. And why this is known as the reaction curve function of the first seller? Because it gives a combination of Q 1 and Q 2 for which the profit of the first seller will be maximum. So, this reaction curve function gives the combination of Q 1 and Q 2 for which the profit of the first seller will be maximum. Similarly, we will find out the iso profit curve for the second seller and the reaction curve function for the second seller. So, pi 2 is P Q 2, P is A plus B Q multiplied by Q 2. Simplifying this A plus B Q is Q 1 plus Q 2 multiplied by Q 2 and this will be also the profit because cost of production is 0. Pi 2 is A Q 2 plus B Q 1 Q 2 plus B Q 2 square. There will be different combination of Q 1 and Q 2 from which this fixed level of profit of the second seller can be obtained. And the locus of all such combination of Q 1 and Q 2 is called as the iso profit curve or the profit indifference curve for the second seller. Then, to maximize the pi 2, again we will follow the same format that del pi 2 with respect to Q 2 has to be equal to 0. A plus B Q 1 2 B Q 2 that has to be equal to 0. 2 B Q 2 is equal to minus B Q 1 minus A and Q 2 is equal to minus half Q 1 A by 2 B. So, reaction curve function for the second seller and what is the reaction curve function of the second seller? It gives a combination of Q 1 and Q 2 for which the profit of the second seller is maximum. So, we have now iso profit curve of the seller 1, seller 2. Iso profit curve gives the different combination of Q 1 and Q 2 which gives the equal level of profit and reaction function gives us the level of different combination of Q 1 and Q 2 where the profit level will be maximum. So, we have set up reaction function and iso profit curve for both the seller 1 and seller 2. Now, how the output is dealt in case of the cornered model of Diopoly? A plus 2 B Q 1 plus B Q 2 is equal to 0 that is our output that is P Q or that is the whatever the output we got it from our previous equation A plus B Q 1 plus 2 B Q 2 is equal to 0. If you will add both then it comes to 2 A plus 3 B Q 1 plus 3 B Q 2 equal to 0 or this is the profit maximizing level of output. So, that is 2 A plus 3 B Q 1 plus Q 2 is equal to 0. So, 2 A plus 3 B Q is equal to 0, 3 B Q is equal to minus 2 A simplifying this finding out the value of Q Q is equal to minus 2 A by 3 B this minus 2 A by 3 B is Diopoly output. Now, if it is a case of a perfect competitive market with the demand curve P is equal to A plus B Q assuming 0 cost equilibrium will be achieved at the price is equal to MC. So, price is equal to 0. So, P is equal to A plus B Q is equal to 0. So, since marginal cost is equal to 0 we get price equal to 0 and price is A plus B Q that is equal to 0 and simplifying or a solving it for a Q that will give us minus A by B this is perfect competitive output. So, minus 2 A by 3 B is the Diopoly output minus A by B is the competitive output. Then we will see this the same demand function with a 0 cost what will be the monopoly output. So, if there is a monopoly market with 0 cost and the same demand function equilibrium will be achieved where marginal revenue is equal to marginal cost. Since marginal cost is equal to 0 then marginal revenue has to be equal to 0, marginal revenue is A plus 2 B Q which is equal to 0, 2 B Q is equal to minus A and Q is equal to minus A by 2 B which is the monopoly output. So, Diopoly output is minus 2 A by 3 B competitive output is minus A by B and monopoly output is minus A by 2 B. So, with 0 cost and straight line demand function the monopoly output is the half of the competitive output and Diopoly output is the two-third of the competitive output. So, if there is a 0 cost and with a straight line demand function the monopoly output is the half of the competitive output and the Diopoly output is the two-third of the competitive output. So, with then we will see this graphical representation of this Connard model how this becomes the how it comes to the equilibrium situation or how generally this equilibrium is stable in case of the Connard's model. So, this is T D star correspondingly we have marginal revenue of A this is P A this is marginal revenue of B this is Q A this is Q B this is price of A this is price of B. Now, how this equilibrium takes place in case of Connard model there are two forms A and B. Form A enter they produce till marginal revenue is equal to marginal cost. Demand curve is D D star marginal revenue is through this we find this this is the Q A level of output O P A is the price. Now, this Q A is the half of the total output O D star if you look at this O Q A is the half of total output O D star. So, A produce O Q A that is half of the total demand. Now, form B will enter and assume that A will continue to produce one half of the total this O D's total demand of the market and that will come as the O Q B. So, what the form B they will do now form B will produce only Q B because they know that form A is going to produce half of the total market demand. Now, what is the market demand available market demand is available is Q A D star. So, you will just take half of it you will produce assuming that the rest will get produced by the form A. Now, what is the demand curve for the form B Q A D star that is the output and A D star is the demand curve for the form B and corresponding marginal revenue curve for form B is MRB. So, what is the output of Q B they will produce at the point where marginal revenue and marginal cost has to be equal to 0. So, B will produce this Q A Q B this is the amount is going to produce price is O P B. So, now combining this A and B together how much they are producing A produce O Q A and B produce Q A Q B and B assume that since A is producing half of it is only produce the half of it. So, together this this is only the three fourth of the market still there is one four remain. So, this one four remain not produced by either A or B and next we will see that generally how this one fourth remain not produced when you take in the different time period simply because that the form B is not changing his assumption or form A is not changing in assumption whenever there is doing a revised plan they are not looking into the rival action and reaction. So, we will continue our discussion on Connard model in next class the again the graphical explanation of reaching to the equilibrium. We will take an example to understand this and we will discuss about the Stackelberg model and Paul Swiggy King demand model in our next session.