Oligopoly Oligopoly Key features of oligopoly barriers to

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 Two firms owing mineral water well Operating with zero costs; MC = 0 Straight line DD Rivals output constant

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

Oligopoly Bertrand’s model Rivals keep price constant Price war

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

Kinked demand for a firm under oligopoly Rs P 1 D O Q 1 Q

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

The MR curve Rs P 1 MR a O Q 1 D AR Q

The MR curve Rs P 1 a D AR b O Q 1 Q MR

The MR curve Rs P 1 a D AR b O Q 1 Q MR

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

Price Stability in kinked demand curve Rs More Elastic MC 3 MC 2 MC 1 P 1 More In elastic a D AR b O Q 1 Q MR

Oligopoly Non-collusive oligopoly: the kinked demand curve theory assumptions of the model the shape of the demand 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

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

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 Industry D AR O Q

Profit-maximising cartel Rs Industry MC Industry D AR Industry MR O Q

Profit-maximising cartel Rs Industry MC P 1 Industry D AR Industry MR O Q 1 Q

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

Price Leadership: Dominant firm market P leader D 1 S 1 P C P 1 P 0 MC A AC P 0 B P 2 P 3 X DL X X 2 MR X 3 X

A price leader aiming to maximise profits for a given market share Rs AR D market O Q

A price leader aiming to maximise profits for a given market share Rs Assume constant market share for leader AR D market AR D leader O Q

A price leader aiming to maximise profits for a given market share Rs AR D market AR D leader MR leader O Q

A price leader aiming to maximise profits for a given market share Rs AR D market AR D leader MR leader O Q

A price leader aiming to maximise profits for a given market share Rs MC AR D market AR D leader MR leader O Q

A price leader aiming to maximise profits for a given market share Rs PL MC l AR D market AR D leader MR leader O QL Q

A price leader aiming to maximise profits for a given market share Rs PL MC l t AR D market AR D leader MR leader O QL QT Q

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

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