4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly...

Oligopoly

Johan Stennek

Oligopoly

•  Example:Zocord– Reducescholesterol– ProducedbyMerck&Co

– PatentexpiredinApril2003(inSweden)– Othercompaniesstartedtosellperfectcopies

(=containingexactlythesameacIveingredientSimvastaIn)

Examples

PriceofZocordinSweden

Nominalpriceperdailydose(SEK)

Oligopoly

•  QuesIon– HowdoescompeIIonwork?– Howstrongisit?– Howdoesthatdependonthemarket?

•  Comparemonopolyandduopoly– Givenmarket(technology,demand)– Q:Howdoespricedependon#firms?

Aduopolymodel(Bertrand)

Duopoly

•  Timing

1.  Firmssetpricessimultaneously

2.  Consumersdecidehowmuchtobuyandfromwhom

NB:FirmshavenoImetoreact!

Duopoly

•  Technology–  Constantmarginalcost–  Firmshavesamemarginalcost

•  Demand– Marketdemand:Linear(example)–  Firms’goodshomogenous

Duopoly

•  Consumerbehavior

–  Allbuyfromcheapestfirm

–  Ifsameprice:50-50split

DuopolyResidualdemand

Marketdemand:D(p)

Competitors price

Marketdemand:D(p)

Competitors price

Marketdemand:D(p)

Residualdemand:Di(p1,p2)

Duopoly

Profits

π i p1, p2( ) = pi − c( )Di p1, p2( )

D1 p1, p2( ) =

D p1( ) p1 < p212D p1( ) if p1 = p2

0 p1 > p2

DuopolyGameTheory

•  Inter-dependentdecisions–  Firm1’sopImalpricedependsonfirm2’sprice

–  Firm2’sopImalpricedependsonfirm1’sprice

•  Howtoanalyze–  Cannotsimplyassumeprofitmaximizingbehavior

–  Gametheory

DuopolyGameTheory

•  Gameinnormalform–  Q:Elementsofagameinnormalform?

•  Players,Strategies,Payoffs–  Players

•  Firm1andFirm2

–  Strategies•  Eachfirmchoosesapricepi(arealnumber)•  Recall:Strategyprofile=Apriceforeachplayer(p1,p2)

–  Payoffs•  Profits•  Recall:PayofffuncIonassignsapayoffforeverypossiblestrategyprofile,πi(p1,p2)

DuopolyGameTheory

•  Nashequilibrium– “Acommonunderstandingamongallplayersofhowtheyareallgoingtobehave”

– Astrategyprofilesuchthatnoplayercanincreaseitspayoffgiventhatallotherplayersfollowtheirstrategies

DuopolyGameTheory

•  Nashequilibriuminduopolygame

–  Apairofprices(p1,p2)suchthat

•  π1(p1,p2)≥π1(p’1,p2)forallp’1

•  π2(p1,p2)≥π2(p1,p’2)forallp’2

DuopolyIntuiIveAnalysis

•  Q: Will the two firms charge pm?

–  Eachwouldsellqm/2

–  Eachwouldearnπm/2

•  What if a firm undercuts to pm – ε?

–  Itwouldsell≈qm

–  Itwouldearn≈πm

•  Conclusion

–  Small reduction in price è Massiveexpansionofsales

–  pm not reasonable prediction

Q:Whatifbothchargep=c?- qi=q*/2- πi=0

q*q*/2

Nounilateralchangeprofitable?-Higherprice→q=0,π=0- Lowerprice→q>0,p<c,π<0

q*q*/2

•  Ifbothfirmschargep=c

– NoincenIvetochangebehavior

– ReasonablepredicIon

– Nashequilibrium

•  Twoformalproofs

– Foreverypossibleoutcome,invesIgateifsomeonehasincenIvetodeviate

– Bestreplyanalysis

Duopoly

Candidate Profitable deviation

p1 > p2 > c who? what?

Duopoly

p1 > p2 > c Firm i pi = pj – ε (max pm)

Duopoly

p1 = p2 > c who? what?

Duopoly

p1 = p2 > c Firm i pi = pj – ε (max pm)

Duopoly

p1 > p2 = c who? what?

Duopoly

p1 > p2 = c Firm 2 p2 = p1 – ε (max pm)

Duopoly

p1 = p2 = c who? what?

Duopoly

p1 = p2 = c - -

DuopolyBest-replyanalysis

Setofallstrategyprofiles

Q:Whatdowemeanby“firm2’sbestreplyfuncIon”?A:Profitmaximizingp2foreverypossiblep1

Whatifp1>pm

Firm2’sbestreply

Whatifc<p1≤pm

Firm2’sbestreply

Whatifp1=c

Firm2’sbestreply

Whatifp1<c

Firm2’sbestreply

SelecIon

Duopoly

Firm1’sbestreply

Duopoly

Firm2’sbestreply

Firm1’sbestreply

NashequilibriumA(p1,p2)thatliesonbothbestreplyfuncIons

WhatispricecompeIIon?Comparemonopolyandduopoly

WhatispricecompeIIon?

•  PredicIon– MorefirmsèLowerprices

•  IsthispredicIontrue?

•  ExtremepredicIon(“Bertrandparadox”)–  2firms=>p=c&π=0

•  Q:ReasonforextremepredicIon?–  Reducepriceonecent,getallcustomers

–  AlwaysprofitabletoreducepricebelowcompeItor,aslongasp>c.

•  Moreooen

– Morefirms:p>c&π>0

–  Reason:Don’tgetallcustomers

–  Examples: ProductdifferenIaIon

•  EsImatedLernerindexes(mark-ups)inautomobiles

•  Conclusion

•  CompeIIondoesnoteliminateallmarkups•  Also

•  3rddegreepricediscriminaIonalsowithcompeIIon•  Highmarkupsinhomecountries

Model Belgium France Germany Italy UK

FiatUno 7.6 8.7 9.8 21.7 8.7

FordEscort 8.5 9.5 8.9 8.9 11.5

Peugeot 9.9 13.4 10.2 9.9 11.6

Mercedes 14.3 14.4 17.2 15.6 12.3

•  TheoreIcallyrobust– ManyothermodelsofoligopolygivesamequalitaIvepredicIon

•  Empirically“confirmed”– ManyempiricalstudiessuggestthatcompeIIonleadstolowerprices

DoesCompeIIonMawer?

Consumersurplus

Profit

Consumersurplus

Duopoly Monopoly

Sourcesofmarketpower1.  Fewfirms&Entrybarriers2.  ProductdifferenIaIon:horizontal&verIcal

3.  QuanItycompeIIon/Capacityconstraints

4.  Costadvantage5.  Uninformedcustomers

6.  Customerswitchingcosts

7.  PricediscriminaIon:informaIon&arbitrage

8.  CartelizaIon

EconomicMethodology•  Economicmodel=Animaginaryeconomy

–  Includekeyfeaturesforissuesathand–  RemoveallcomplicaIons(egcompeIIon)–  AddfeaturessequenIally(egcompeIIon)

•  Pros–  Easytoseeprinciples–  Candoexperiments(egWhatistheeffectofcompeIIon)

•  Cons–  Notthefullpicture–  AreconclusionstrueorarIfacts?

CournotModel(AlternaIvetoBertrand)

QuanItyCompeIIon

•  Bertrandmodel– Firmssetprices– ConsumersdecidequanIIes(firmsmustdeliver)

•  Cournotmodel– FirmschosequanIIes– Thenpriceissettoclearthemarket

•  Note1:Differencemawers(contrasttomonopoly)

•  Note2:TwodifferentinterpretaIons

QuanItyCompeIIon•  FirstinterpretaIon

–  Stage1:Firmsproduce:q1,q2–  Stage2:FirmsbringproducetoaucIon:p=P(q1+q2)

•  Example–  Fishingvillage

•  Note–  Pricingdecisionisdelegated–  Butequilibriumpriceaffectedbyamountproduced–  Weomittheissuewhyp=P(q1+q2)

QuanItyCompeIIon

•  SecondinterpretaIon:Two-stagegame–  Stage1:FirmschosecapaciIes:k1,k2

–  Stage2:Firmssetprices:p1,p2

•  Note:– UndersomecondiIonsp1=p2=P(k1+k2)

– Thenstudychoiceofcapacity(=quanIty)

DuopolyGameTheory

•  Gameinnormalform–  Q:Elementsofagameinnormalform?

•  Players,Strategies,Payoffs–  Players

•  Firm1andFirm2

–  Strategies•  EachfirmchoosesaquanItyqi(arealnumber)•  Recall:Strategyprofile=AquanItyforeachplayer(q1,q2)

–  Payoffs•  Profits:πi(q1,q2)=P(q1+q2)・qi–C(qi)

•  Recall:PayofffuncIonassignsapayoffforeverypossiblestrategyprofile,πi(p1,p2)

ExogenouscondiIons

•  Simplify1:Technology– Constantmarginalcost– Firmshavesamemarginalcost

•  Simplify2:Demand– Firms’goodshomogenous– Marketdemand:Linear

CournotDuopoly

•  Technology–  Constantmarginalcosts,c

•  Demand(linear)–  Individualdemand: q=a–p–  Numberofconsumers: m– Marketdemand: Q=m*(a–p)

CournotDuopoly

•  Exercise:–  Solvethemodel

•  Steps:1. SetupprofitfuncIons2. Findbest-replyfuncIons3. FindequilibriumquanIIes4. Findequilibriumprice

Definethegame

Profitπ1 q1,q2( ) = P q1 + q2( ) ⋅q1 −C q1( )

Rewrite

π1 q1,q2( ) = a − 1m ⋅ q1 + q2( )− c( ) ⋅q1

DemandQ p( ) = m ⋅ a − p( )

Indirect demandp = a − 1

m ⋅ q1 + q2( )

Derivebest-replyfuncIonsProfitπ1 q1,q2( ) = P q1 + q2( ) ⋅q1 −C q1( )

Rewrite

π1 q1,q2( ) = a − 1m ⋅ q1 + q2( )− c( ) ⋅q1

FOC∂π1 q1,q2( )

= a − 1m ⋅ q1 + q2( )− c( )− 1

m ⋅q1 = 0

Solve for best reply function

q1 =m ⋅ a − c( )

2− 1

2⋅q2

Derivebest-replyfuncIonsq1

a − c( ) ⋅m2

Firm 1's best-reply function

q1 =a − c( ) ⋅m

2− 1

2⋅q2

Derivebest-replyfuncIonsq1

a − c( ) ⋅m2

q1 =a − c( ) ⋅m

2− 1

q2 =a − c( ) ⋅m

2− 1

a − c( ) ⋅m2

ComputeequilibriumquanIIesq1

ComputeequilibriumquanIIesEquilibrium

q1 =a − c( ) ⋅m

2− 1

2⋅q2

q2 =a − c( ) ⋅m

2− 1

2⋅q1

Find q1*

a − c( ) ⋅m2

− 12⋅

a − c( ) ⋅m2

− 12⋅q1

*⎛⎝⎜

⎞⎠⎟

Solve for q1*

a − c( ) ⋅m3

ComputeequilibriumquanIIesq1

Equilibrium

a − c( ) ⋅m3

Computeequilibriumprice

Equilibrium price

p* = a − 1m⋅ q1

* + q2*( )

p* = a − 1m⋅

a − c( ) ⋅m3

+a − c( ) ⋅m

3⎛⎝⎜

⎞⎠⎟

p* = a + 2 ⋅c3

Comparewithmonopoly

Question: Effect of competition on price?

p* = a + 2 ⋅c3

pm = a + c2

Answer: Duopoly price lower

p* < pm

a + 2 ⋅c3

< a + c2

Conclusion:Morefirmsimplieslowerprices

CompareCournot-Bertrand

Bertrand

p* = c

Cournot

p* = a + 2 ⋅c3

•  Bertrand:Cheaptostealcustomers– Lowerpricealiwle⇒Stealallconsumers

•  Cournot:Expensivetostealcustomers– Tostealalotofconsumers,afirmneedstoincreaseitsproducIonalot⇒largereducIoninequilibriumprice

Competitors price

Marketdemand

Residualdemand

Competitors quantity

Marketdemand

Residualdemand

Bertrand Cournot

Competitors price

Marketdemand

Residualdemand

Competitors quantity

Marketdemand

Residualdemand

Bertrand Cournot

CournotDuopoly:GraphicalSoluIon

CournotDuopolyResidualDemand

Market clearing price

Assume firm 2 will produce q2. How will market price vary with q1?

Market clearing price Assume firm 2 will produce q2.

How will market price vary with q1?

P(0+q2) *

D q1 0

If q1 = 0, then p = P(0+q2)

P(0+q2) *

D q1 0

If q1 = q’1, then p = P(q’1+q2)

q’1 q2+q’1

P(q’1+q2) *

P(0+q2) *

D q1 0

Two point on firm 1’s residual demand

q’1 q2+q’1

P(q’1+q2) *

P(0+q2)

D q1 0 q’1 q2+q’1

P(q’1+q2)

D1 is a parallel shift of D by q2 units

CournotDuopolyBestReply

Quantity

Assume firm 2 will produce q2. How much will firm 1 produce?

Quantity

Assume firm 2 will produce q2. How much will firm 1 produce?

P(q2+ q*1)

Assume firm 2 will increases production. How will firm 1 react?

Quantity D +Δq2 -Δq1

If Firm 2 produces more, Firm 1 produces less

Quantity D +Δq2 -Δq1

Note: P(q1 + q2) is reduced Hence: q1 + q2 is increased Hence: q1 reduced by less than q2 increased

Quantity

If q2 = 0 Then q1 = qm

Quantity

If q2 = qc Then q1 = 0

D qc D1

q*1(0) = qm

q*1(qc) = 0

Negative slope

Less than -1

CournotDuopolyEquilibrium

Firm 2’s best reply

Equilibrium: Both a doing their best, given what the other does

qm < 2qn < qc

q1+q2=qc

4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly...

Documents

Transcript of 4 - Oligopoly (slides) - stennek.sestennek.se/onewebmedia/4 - Oligopoly (slides).pdf · 4 Oligopoly...

Building brand awareness in dynamic oligopoly marketsheuristic.kaist.ac.kr/cylee/xpolicy/termproject/08/[4]brand awareness.… · Oligopoly market Characteristic of Oligopoly market

Strategic Decisions Making in Oligopoly Markets Today's lectures will look at Oligopoly markets Today's lectures will look at Oligopoly markets Features.

Monopoly & Oligopoly

Oligopoly, Microeconomics

NONCOOPERATIVE OLIGOPOLY MODELS Definition 1 (Oligopoly ...

Oligopoly Chapter 16-2. Models of Oligopoly Behavior No single general model of oligopoly behavior exists.No single general model of oligopoly behavior.

UNIT III: MONOPOLY & OLIGOPOLY Monopoly Oligopoly Strategic Competition 7/20.

Dynamic Oligopoly

Cournot Oligopoly

Oligopoly - asc.ohio-state.edu · Oligopoly Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition,

Oligopoly (OPEC)

Oligopoly Overheads

Lecture 5: Scheduling · • 5 points/queson. – Queson 5 was worth 1 extra point. • Memcpy ‐ “Protecng memory state” – Not privileged. – Memory state = meta‐data concerning

1. OLIGOPOLY

Isturgidejaa laluzrestos queson “únicosen elmundo”

Oligopoly Theory 1 Oligopoly Theory (14) Mixed Oligopoly Aim of this lecture (1) To understand the concept of mixed oligopoly. (2) To understand the result.

Final Oligopoly

Oligopoly Present

Oligopoly Oligopoly is a market structure in which the number of ...

Chapter 7.2 Oligopoly & Cartels Chapter 7.2 Oligopoly & Cartels.