it is said in oligopoly market the prices are rigid, the who decides the fixed price for their respective product or commodity?
In the oligopoly market, the firms take their own price and output decisions. However, the prices are rigid because of the fact that there exists high degree of mutual interdependence among the firms. The counter decisions of the rival firms restricts an individual firm to take the price decisions independently. For instance, if a firm wants to increase its price then the rival firms may not follow the suit and the firm may loose all its customers to the rival firms. On the other hand, if it reduces the price others will also reduce the price with the fear of losing the customers and the firm that initiated the price reduction will not benefit. Thus, there does not exists incentives for the firm to either lower the price or increase the price. That is why we say that the prices in the oligopoly market are rigid or sticky.
There is not a single theory which satisfactorily explains the pricing and output decisions under cluopoly or oligopoly. The reasons are; (1) The number of, firms, dominating the market vary. Sometimes there are only two or three firms which dominate the entire market (Tight oligopoly). At another time there may be 7 to 10 firms which capture 80% of the market (loose oligopoly).(2) The goods produced under oligopoly may or may not be standardized.(3) The firms under oligopoly sometime cooperate with each other in the fixing of price and output of goods. At another time, they.prefer to act independently.(4) There are situations also where barriers to entry are very strong in oligopoly and at another time, they are quite loose..(5) A firm under oligopoly cannot predict with certainly the reaction of the rival firms, if it increases or decreases the prices and output of its goods. Keeping in view the wide range of diversity of market situations, a number of models have been developed explaining the behaviour of the oligopolistics firms.We briefly discuss three important economic models of oligopoly.(1) Price and output determination under collusive Oligopoly.(2) Price and output determination under non-collusive oligopoly.(3) Price leadership model. 1. Price and Output Determination under Collusive Oligopoly. The term collusion implies to play together. When firms under oligopoly agree formally not to compete with each other about price or output, it is Called collusive oligopoly. The firms may agree on setting output quota, or fix prices or limit product promotion or agree not to poach in each others market: The completing firms thus from a cartel. The members of firms behave as if they are a single firm.Assumptions: For price output determination in a collusive oligopoly, we assume that (i) there are only three firms in the industry and they form a cartel .(ii) the products of all the three firms are homogenous (iii) the cost curves of these firms are identical.Under the assumptions stated above, the equilibrium of the industry, under collusiveoligopoly is explained with the help of a diagram.In this figure 17.4, the industry demand curve DD consisting of three firms is identical. So is the case with the MR curve and MC curve which are identical. The cartels MR curve intersects the MC curve at point L. Profits are maximized at output 001 where MC = MR. The cartel will set a price OP, at which 001 output will be demanded.Having agreed on the cartel price, themembers may then complete each other using non Industry D = ARprice competition to gain as big share of resulting Industry MR sales 001 as they can.There is another alternative also. The cartel Profit-mwdmising cartel members may agree to divide the market between, them. Each member would given a quota. The sum of all the quotas, must add up to 01. In case the quotas exceeded 0Q1 either the output will remain unsold at OP price or the price would fall.