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Oligopoly

Oligopoly. 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

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Oligopoly

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  1. Oligopoly

  2. Oligopoly • Key features of oligopoly • barriers to entry • interdependence of firms • incentives to compete versus incentives to collude • Collusive • Non Collusive

  3. 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

  4. Duopoly Firm A Period 1: OA; ie, ½ P D 2 : ½ (1-1/4) = 3/8 e=1 P Firm B Period 1: AB; ie ½ of ½ = ¼ P` 2: ½ (1-3/8) = 5/16 D B A o MRb MRb X MRa

  5. Oligopoly • Bertrand’s model • Rivals keep price constant • Price war

  6. Oligopoly • Non-collusive oligopoly: the kinked demand curve theory • assumptions of the model

  7. Kinked demand for a firm under oligopoly Rs P1 D Q O Q1

  8. Kinked demand for a firm under oligopoly • Non-collusive oligopoly: the kinked demand curve theory • assumptions of the model • the shape of the demand and MR curves

  9. The MR curve Rs P1 MR a D AR Q O Q1

  10. The MR curve Rs P1 a D AR b Q O Q1 MR

  11. The MR curve Rs P1 a D AR b Q O Q1 MR

  12. Oligopoly • Non-collusive oligopoly: the kinked demand curve theory • assumptions of the model • the shape of the demand and MR curves • stable prices

  13. Price Stability in kinked demand curve Rs More Elastic MC3 MC2 MC1 P1 More In elastic a D AR b Q O Q1 MR

  14. Oligopoly • 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

  15. Oligopoly • Non-collusive oligopoly: game theory • alternative strategies: maximax and maximin • simple dominant strategy games

  16. Oligopoly • Non-collusive oligopoly: game theory • alternative strategies: maximax and maximin • simple dominant strategy games • the prisoners’ dilemma

  17. The prisoners' dilemma A's alternatives Not confess Confess B's alternatives B gets 10 years A gets 3 months Each gets 1 year (1,1)‏ Not confess B gets 3 months A gets 10 years Each gets 3 years (3,3)‏ Confess

  18. 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

  19. 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

  20. Profit-maximising cartel Rs Industry D AR O Q

  21. Profit-maximising cartel Rs Industry MC Industry D AR Industry MR O Q

  22. Profit-maximising cartel Rs Industry MC P1 Industry D AR Industry MR Q1 O Q

  23. Oligopoly • Tacit collusion • price leadership: dominant firm (large or low cost)‏ • price leadership: barometric (old experienced)‏ • aggressive

  24. Price Leadership: Dominant firm market leader D1 S1 P C P MC P1 P1 AC P0 P0 B A P2 P2 P3 P3 DL X X X3 X2 X MR

  25. A price leader aiming to maximise profits for a given market share Rs AR Dmarket O Q

  26. A price leader aiming to maximise profits for a given market share Rs Assume constant market share for leader AR Dmarket AR Dleader O Q

  27. A price leader aiming to maximise profits for a given market share Rs AR Dmarket AR Dleader MRleader O Q

  28. A price leader aiming to maximise profits for a given market share Rs AR Dmarket AR Dleader MRleader O Q

  29. A price leader aiming to maximise profits for a given market share Rs MC AR Dmarket AR Dleader MRleader O Q

  30. A price leader aiming to maximise profits for a given market share Rs MC l PL AR Dmarket AR Dleader MRleader O QL Q

  31. A price leader aiming to maximise profits for a given market share Rs MC l t PL AR Dmarket AR Dleader MRleader O QL QT Q

  32. Oligopoly • Tacit collusion • price leadership: dominant firm (large)‏ • price leadership: barometric (old experienced)‏ • Aggressive • other forms of tacit collusion: rules of thumb • average cost pricing

  33. Oligopoly • Tacit collusion • price leadership: dominant firm • price leadership: barometric • other forms of tacit collusion: rules of thumb • average cost pricing • price benchmarks

  34. Thank you…………………..

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