The Effect of Competition Monopoly Oligopoly Bertrands model

The Effect of Competition • Monopoly • Oligopoly • Bertrand’s model – Quantity can be easily adjusted. • Cournot’s model – Quantities are chosen first, and can’t be easily altered; then prices are set.

Monopolist Market price Demand: p=5 -q P* = 3 =4 c=1 Quantity q* = 2

Bertrand model of competition Price LRAC 1 07/14/04 2 3 # of firms 4 B 189 - Simon Rodan 5 6 4

The Oil Super Majors Sales ($B) Net Income ($B) ROE Royal Dutch Shell 475 26 5% Exxon 434 45 10% BP 377 17 5% Chevron 230 27 12% Total SA 222 14 6% Data are for FY 2011

Expected Duopoly Profit Market price Demand: p=5 -q P* = 3 2=2 c=1 Quantity q* = 2

Cournot’s Duopoly Prediction Market price 1 and 2=3. 54 P* = 2. 33 =. 77 Demand: p=5 -q c=1 Quantity Simulation q* = 2. 66

Cournot’s Duopoly Prediction Market price 1, 2 and 3=3 Demand: p=5 -q P* = 2 = = = c=1 Quantity q* = 3

Potential price Cournot model of competition (quantity) LRAC 1 07/14/04 2 3 # of firms 4 B 189 - Simon Rodan 5 6 9

Firm Size Industry Profile

Industry concentration 120 100 80 Sales • Industries with few firms are ‘concentrated’ • Industries with many firms are ‘fragmented’ • However, most industries have both large and small firms 60 40 20 0 1 11 21 31 Firm rank (by sales) 41

Some more examples

Assessing concentration • Four Firm Concentration Ratio (CR 4) – Add up the sales for all firms in the industry – Add up the sales of the four largest firms in the industry – Divide the second number by the first • OR – Add the market shares of the four largest firms (this is exactly equivalent to the first method)