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Understanding Oligopoly Market Structures and Strategies

Learn about oligopoly market structures, strategic models like Cournot and Bertrand, collusion incentives, and industry concentration ratios. Explore real-world examples and implications for consumers.

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Understanding Oligopoly Market Structures and Strategies

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  1. L22 Oligopoly

  2. Market structure Market structures: • Oligopoly – industry with 2 or more large sellers. • Intermediate level of fixed cost • Have market power (but smaller than monopoly) • Also: oligopsony and bilateral oligopoly pall

  3. Oligopolies in practice • Examples of oligopolies in the USA: - accounting & audit services, tobacco, beer, aircraft, military equipment, motor vehicle, film and music recording industries • Inefficiency and regulation • Federal Trade Commission

  4. Oligopolies in practice • Market share • Industry is legally recognized as oligopolistic 1. concentration ratio “big four”>40% (share of top 4 firms in the market) • Concentrated industry if CR>40% 2. HERFINDAHL-HIRSCHMAN Index (HHI) • Moderately concentrated industries HHI>1000 • Concentrated industry HHI>1800

  5. IO - Models • Strategic environment – harder than before • Careful about timing and strategy • Quantities - chosen simultaneously (Cournot) - leader and follower (Stackelberg) • Prices (Bertrand) • When goods are not homogenous - Monopolistic competition

  6. Cournot Model - Assumptions • Homogenous good • 2 firms (duopoly) • Aggregate supply • Market price • chosen simultaneously • Cost function • Maximize profit

  7. Firm 1: Best response to

  8. Best response: Geometry

  9. Cournot-Nash Equilibrium: • Cournot equilibrium : Output of each firm is a best response to the output of the other firm • No firm has incentives to deviate, given production of the other firm.

  10. Equilibrium (Example)

  11. Nash Equilibrium: Geometry

  12. Incentives to collude • Are there profit incentives for both firms to “cooperate” by lowering their output levels? • If yes than collusion. • Firms that collude form a cartel. • Good for firms, bad for consumers and efficiency (DWL) • Under what condition cartels are stable?

  13. Collusion

  14. Collusion: Geometry

  15. Incentives to collude • In long run reputation helps! - see movie ``Informant’’ • Cartels are hard to sustain if: • Only short run interactions • Imperfect monitoring of price • Alternative: Mergers - Problem: Federal Trade Commission

  16. Cournot with N firms

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