Post on 22-Dec-2015
OligopolyOligopoly
Oligopoly
Key features of oligopoly barriers to entry
interdependence of firms
incentives to compete versus incentives to collude
Collusive
Non Collusive
Duopoly: Limiting case of Oligopoly Non Collusive Oligopoly Cournot’s Duopoly Model What is Dupoloy? Two sellers Two firms owing mineral water
well Operating with zero costs; MC =
0 Straight line DD Rivals output constant
Duopoly
Firm APeriod 1: OA; ie, ½
Xo
PD
D
MRbA B
MRa
Pe=1
Firm BPeriod 1: AB; ie ½ of ½ = ¼ P`
MRb
2 : ½ (1-1/4) = 3/8
2: ½ (1-3/8) = 5/16
Oligopoly Bertrand’s model Rivals keep price constant Price war
Non-collusive oligopoly: the kinked demand curve theory
assumptions of the model
Oligopoly
Kinked demand for a firm under oligopoly
Rs
QO
P1
Q1
D
Non-collusive oligopoly: the kinked demand curve theory
assumptions of the model
the shape of the demand and MR curves
Kinked demand for a firm under oligopoly
The MR curve
Rs
QO
P1
Q1
D ARa
MR
Rs
QO
P1
Q1
MR
a
bD AR
The MR curve
Rs
QO
P1
Q1
MR
a
bD AR
The MR curve
Non-collusive oligopoly: the kinked demand curve theory
assumptions of the model
the shape of the demand and MR curves
stable prices
Oligopoly
Price Stability in kinked demand curve
Rs
QO
P1
Q1
MC3
MC1
MR
a
b
D AR
MC2
More Elastic
MoreIn elastic
Non-collusive oligopoly: the kinked demand curve theory
assumptions of the model
the shape of the demand and MR curves
stable prices
limitations of the model
Oligopoly
Non-collusive oligopoly: game theory alternative strategies: maximax and
maximin simple dominant strategy games
Oligopoly
Non-collusive oligopoly: game theory alternative strategies: maximax and
maximin
simple dominant strategy games
the prisoners’ dilemma
Oligopoly
The prisoners' dilemma
Not confess Confess
Notconfess
Confess
A's alternatives
B'salternatives
Each gets1 year(1,1)
Each gets3 years
(3,3)
B gets3 months
A gets10 years
B gets10 yearsA gets
3 months
Collusive Oligopoly Cartels
Direct agreements among competing oligopolist firms with the aim of reducing uncertainty
Two forms of catrtels Joint profit maximisation Sharing of market share
Equilibrium of the industry
Collusive Oligopoly Cartels
Direct agreements among competing oligopolist firms with the aim of reducing uncertainty
Two forms of catrtels Joint profit maximisation Sharing of market share
Equilibrium of the industry
Profit-maximising cartel
Rs
Q O
Industry D AR
Rs
Q O
Industry D AR
Industry MC
Industry MR
Profit-maximising cartel
Rs
Q O
Industry D AR
P1
Industry MC
Q1
Industry MR
Profit-maximising cartel
Tacit collusion price leadership: dominant firm (large or
low cost)
price leadership: barometric (old
experienced)
aggressive
Oligopoly
Price Leadership: Dominant firm
market leader
X
PPC
P1
P0
P3
P1
P0
X
MR
DL
X X3
MC
AC
D1
P2
X2
P2
P3
S1
A B
A price leader aiming to maximise profits for a given market share
Rs
Q O
AR D market
A price leader aiming to maximise profits for a given market share
Rs
Q O
AR D leader
AR D market
Assume constantmarket share
for leader
A price leader aiming to maximise profits for a given market share
Rs
Q O
MR leader
AR D leader
AR D market
A price leader aiming to maximise profits for a given market share
Rs
Q O
MR leader
AR D leader
AR D market
A price leader aiming to maximise profits for a given market share
Rs
Q O
MC
MR leader
AR D leader
AR D market
A price leader aiming to maximise profits for a given market share
Rs
Q O
PL
MC
MR leader
AR D leader
QL
l
AR D market
A price leader aiming to maximise profits for a given market share
Rs
Q O
AR D market PL
MC
QT
MR leader
AR D leader
QL
l t
Tacit collusion price leadership: dominant firm (large)
price leadership: barometric (old
experienced)
Aggressive
other forms of tacit collusion: rules of
thumboaverage cost pricing
Oligopoly
Tacit collusion
price leadership: dominant firm
price leadership: barometric
other forms of tacit collusion: rules of
thumboaverage cost pricingoprice benchmarks
Oligopoly
Thank you…………………..