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…………………..