Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf ·...
-
Upload
trinhkhanh -
Category
Documents
-
view
235 -
download
4
Transcript of Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf ·...
![Page 1: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/1.jpg)
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Managerial Economics & Business Strategy
Chapter 9Basic Oligopoly
Models
![Page 2: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/2.jpg)
9-2
OverviewI. Conditions for Oligopoly?II. Role of Strategic InterdependenceIII. Profit Maximization in Four Oligopoly
Settings– Sweezy (Kinked-Demand) Model– Cournot Model– Stackelberg Model
– Bertrand Model
IV. Contestable Markets
![Page 3: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/3.jpg)
9-3
Oligopoly Environment
� Relatively few firms, usually less than 10.– Duopoly - two firms– Triopoly - three firms
� The products firms offer can be either differentiated or homogeneous.
� Firms’ decisions impact one another.� Many different strategic variables are
modeled:– No single oligopoly model.
![Page 4: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/4.jpg)
9-4
Role of Strategic Interaction
� Your actions affect the profits of your rivals.
� Your rivals’ actions affect your profits.
� How will rivals respond to your actions?
![Page 5: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/5.jpg)
9-5
An Example
� You and another firm sell differentiated products.
� How does the quantity demanded for your product change when you change your price?
![Page 6: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/6.jpg)
9-6
P
Q
D1 (Rival holds itsprice constant)
P0
PL
D2 (Rival matches your price change)
PH
Q0QL2 QL1QH1 QH2
![Page 7: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/7.jpg)
9-7
P
Q
D1
P0
Q0
D2 (Rival matches your price change)
(Rival holds itsprice constant)
D
Demand if Rivals Match Price Reductions but not Price Increases
![Page 8: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/8.jpg)
9-8
Key Insight
� The effect of a price reduction on the quantity demanded of your product depends upon whether your rivals respond by cutting their prices too!
� The effect of a price increase on the quantity demanded of your product depends upon whether your rivals respond by raising their prices too!
� Strategic interdependence: You aren’t in complete control of your own destiny!
![Page 9: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/9.jpg)
9-9
Sweezy (Kinked-Demand) Model Environment
� Few firms in the market serving many consumers.� Firms produce differentiated products.� Barriers to entry.� Each firm believes rivals will match (or follow) price
reductions, but won’t match (or follow) price increases.
� Key feature of Sweezy Model– Price-Rigidity.
![Page 10: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/10.jpg)
9-10
Sweezy Demand and Marginal Revenue
P
Q
P0
Q0
D1(Rival holds itsprice constant)
MR1
D2 (Rival matches your price change)
MR2
DS: Sweezy Demand
MRS: Sweezy MR
![Page 11: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/11.jpg)
9-11
Sweezy Profit-Maximizing Decision
P
Q
P0
Q0
DS: Sweezy DemandMRS
MC1MC2
MC3
D2 (Rival matches your price change)
D1 (Rival holds price constant)
![Page 12: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/12.jpg)
9-12
Sweezy Oligopoly Summary
� Firms believe rivals match price cuts, but not price increases.
� Firms operating in a Sweezy oligopoly maximize profit by producing where
MRS = MC.– The kinked-shaped marginal revenue curve implies
that there exists a range over which changes in MC will not impact the profit-maximizing level of output.
– Therefore, the firm may have no incentive to change price provided that marginal cost remains in a given range.
![Page 13: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/13.jpg)
9-13
Cournot Model Environment
� A few firms produce goods that are either perfect substitutes (homogeneous) or imperfect substitutes (differentiated).
� Firms’ control variable is output in contrast to price.
� Each firm believes their rivals will hold output constant if it changes its own output (The output of rivals is viewed as given or “fixed”).
� Barriers to entry exist.
![Page 14: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/14.jpg)
9-14
Inverse Demand in a CournotDuopoly
� Market demand in a homogeneous-product Cournot duopoly is
� Thus, each firm’s marginal revenue depends on the output produced by the other firm. More formally,
212 2bQbQaMR −−=
121 2bQbQaMR −−=
( )21 QQbaP +−=
![Page 15: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/15.jpg)
9-15
Best-Response Function
� Since a firm’s marginal revenue in a homogeneous Cournot oligopoly depends on both its output and its rivals, each firm needs a way to “respond” to rival’s output decisions.
� Firm 1’s best-response (or reaction) function is a schedule summarizing the amount of Q1 firm 1 should produce in order to maximize its profits for each quantity of Q2 produced by firm 2.
� Since the products are substitutes, an increase in firm 2’s output leads to a decrease in the profit-maximizing amount of firm 1’s product.
![Page 16: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/16.jpg)
9-16
Best-Response Function for a Cournot Duopoly
� To find a firm’s best-response function, equate its marginal revenue to marginal cost and solve for its output as a function of its rival’s output.
� Firm 1’s best-response function is (c1 is firm 1’s MC)
� Firm 2’s best-response function is (c2 is firm 2’s MC)
( ) 21
211 2
1
2Q
b
caQrQ −−==
( ) 12
122 2
1
2Q
b
caQrQ −−==
![Page 17: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/17.jpg)
9-17
Graph of Firm 1’s Best-Response Function
Q2
Q1
(Firm 1’s Reaction Function)
Q1M
Q2
Q1
r1
(a-c1)/b Q1 = r1(Q2) = (a-c1)/2b - 0.5Q2
![Page 18: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/18.jpg)
9-18
Cournot Equilibrium
� Situation where each firm produces the output that maximizes its profits, given the the output of rival firms.
� No firm can gain by unilaterally changing its own output to improve its profit.– A point where the two firm’s best-response
functions intersect.
![Page 19: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/19.jpg)
9-19
Graph of Cournot Equilibrium
Q2*
Q1*
Q2
Q1
Q1M
r1
r2
Q2M
Cournot Equilibrium
(a-c1)/b
(a-c2)/b
![Page 20: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/20.jpg)
9-20
Summary of Cournot Equilibrium
� The output Q1* maximizes firm 1’s
profits, given that firm 2 produces Q2*.
� The output Q2* maximizes firm 2’s
profits, given that firm 1 produces Q1*.
� Neither firm has an incentive to change its output, given the output of the rival.
� Beliefs are consistent: – In equilibrium, each firm “thinks” rivals will
stick to their current output – and they do!
![Page 21: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/21.jpg)
9-21
Firm 1’s Isoprofit Curve
� The combinations of outputs of the two firms that yield firm 1 the same level of profit
Q1Q1
M
r1
π1 = $100
π1 = $200
Increasing Profits for
Firm 1D
Q2
A
BC
![Page 22: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/22.jpg)
9-22
Another Look at CournotDecisions
Q2
Q1Q1
M
r1
Q2*
Q1*
Firm 1’s best response to Q2*
π 1 = $100
π 1 = $200
![Page 23: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/23.jpg)
9-23
Another Look at CournotEquilibrium
Q2
Q1Q1
M
r1
Q2*
Q1*
Firm 1’s Profits
Firm 2’s Profits
r2
Q2M Cournot Equilibrium
![Page 24: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/24.jpg)
9-24
Impact of Rising Costs on the Cournot Equilibrium
Q2
Q1
r1**
r2
r1*
Q1*
Q2*
Q2**
Q1**
Cournot equilibrium prior to
firm 1’s marginal cost increase
Cournot equilibrium after
firm 1’s marginal cost increase
![Page 25: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/25.jpg)
9-25
Collusion Incentives in CournotOligopoly
Q2
Q1
r1
Q2M
Q1M
r2
Cournot2π
Cournot1π
![Page 26: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/26.jpg)
9-26
Stackelberg Model Environment
� Few firms serving many consumers.� Firms produce differentiated or
homogeneous products.� Barriers to entry.� Firm one is the leader.
– The leader commits to an output before all other firms.
� Remaining firms are followers.– They choose their outputs so as to maximize
profits, given the leader’s output.
![Page 27: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/27.jpg)
9-27
Stackelberg Equilibrium
Q1Q1
M
r1
Q2C
Q1C
r2
Q2
Q1S
Q2S
Follower’s Profits Decline
Stackelberg Equilibrium
πLS
π1C
πFS
π2C
![Page 28: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/28.jpg)
9-28
The Algebra of the StackelbergModel
� Since the follower reacts to the leader’s output, the follower’s output is determined by its reaction function
� The Stackelberg leader uses this reaction function to determine its profit maximizing output level, which simplifies to
( ) 12
122 5.02
Qb
caQrQ −−==
b
ccaQ
2
2 121
−+=
![Page 29: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/29.jpg)
9-29
Stackelberg Summary� Stackelberg model illustrates how
commitment can enhance profits in strategic environments.
� Leader produces more than the Cournotequilibrium output.– Larger market share, higher profits.
– First-mover advantage.
� Follower produces less than the Cournotequilibrium output.– Smaller market share, lower profits.
![Page 30: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/30.jpg)
9-30
Bertrand Model Environment
� Few firms that sell to many consumers.� Firms produce identical products at constant
marginal cost.� Each firm independently sets its price in order
to maximize profits (price is each firms’control variable).
� Barriers to entry exist.� Consumers enjoy
– Perfect information. – Zero transaction costs.
![Page 31: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/31.jpg)
9-31
Bertrand Equilibrium
� Firms set P1 = P2 = MC! Why?
� Suppose MC < P1 < P2.� Firm 1 earns (P1 - MC) on each unit sold, while
firm 2 earns nothing.� Firm 2 has an incentive to slightly undercut firm
1’s price to capture the entire market.
� Firm 1 then has an incentive to undercut firm 2’s price. This undercutting continues...
� Equilibrium: Each firm charges P1 = P2 = MC.
![Page 32: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/32.jpg)
9-32
Contestable Markets� Key Assumptions
– Producers have access to same technology.– Consumers respond quickly to price changes.– Existing firms cannot respond quickly to entry by
lowering price.– Absence of sunk costs.
� Key Implications– Threat of entry disciplines firms already in the
market.– Incumbents have no market power, even if there is
only a single incumbent (a monopolist).
![Page 33: Chapter 9 Basic Oligopoly Models - ubalt.eduhome.ubalt.edu/NTSBSAWH/ECON305_PPT/Chap009.pdf · Chapter 9 Basic Oligopoly Models. 9-2 Overview ... Role of Strategic Interdependence](https://reader034.fdocuments.us/reader034/viewer/2022042510/5a6fa5297f8b9abb538b4853/html5/thumbnails/33.jpg)
9-33
Conclusion
� Different oligopoly scenarios give rise to different optimal strategies and different outcomes.
� Your optimal price and output depends on …– Beliefs about the reactions of rivals.– Your choice variable (P or Q) and the nature of the
product market (differentiated or homogeneous products).
– Your ability to credibly commit prior to your rivals.