1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M Gottheil

2 Chapter 12 Price and Output Determination Under Oligopoly 6/14/2016 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with Kinked Demand CurvePrice Leadership Game Theory Cartels Horizontal, Vertical, and Conglomerate Mergers © ©1999 South-Western College Publishing Balanced and Unbalanced Oligopoly The Concentration Ratio and Herfindahl-Hirschman Index Brand Multiplication Price Discrimination

4 What is Oligopoly? A market structure consisting of only a few firms producing goods that are close substitutes © ©1999 South-Western College Publishing

5 What are some examples of Oligopoly? Automobiles Steel Soup Cereals © ©1999 South-Western College Publishing

6 What determines if a market is an Oligopoly? The concentration ratio © ©1999 South-Western College Publishing

7 What concentration ratio constitutes an Oligopoly? There is no magic number, but if a large percentage of the sales are from the 4 largest firms, it’s an Oligopoly © ©1999 South-Western College Publishing

8 What is an example of a high concentration ratio? Out of 151 firms in the aircraft industry the leading 4 constitutes 79% of total sales © ©1999 South-Western College Publishing

9 For more information on industry concentration check out these web pages /www/manumenu.htmlhttp:// /www/manumenu.html © ©1999 South-Western College Publishing

10 What is the Herfindahl- Hirschman Index (HHI)? A measure of industry concentration, calculated as the sum of the squares of the market shares held by each firm in the industry © ©1999 South-Western College Publishing

11 How Oligopolistic is the U.S. Economy? Oligopoly is very much of a fact of life in the U.S. © ©1999 South-Western College Publishing

12 Is the U.S. becoming more Oligopolistic? NO © ©1999 South-Western College Publishing

13 What is Market Power? A firm’s ability to select and control market price and output © ©1999 South-Western College Publishing

14 What is an Unbalanced Oligopoly? An oligopoly in which the sales of the leading firms are distributed unevenly among them © ©1999 South-Western College Publishing

15 What is a Balanced Oligopoly? An oligopoly in which the sales of the leading firms are distributed fairly evenly among them © ©1999 South-Western College Publishing

16 In which type is market power most concentrated? Unbalanced Oligopoly © ©1999 South-Western College Publishing

17 Why do Oligopolies exist? Mergers Economies of scale Reputation Strategic barriers Government barriers © ©1999 South-Western College Publishing

18 What is a Horizontal Merger? A merger between firms producing the same good in the same industry © ©1999 South-Western College Publishing

19 What is a Vertical Merger? A merger between firms that have a supplier - purchaser relationship © ©1999 South-Western College Publishing

20 What is a Conglomerate Merger? A merger between firms in unrelated industries © ©1999 South-Western College Publishing

21 For more information on mergers check out these sites: newsipos.htmlhttp:// newsipos.html © ©1999 South-Western College Publishing

22 What is Collusion? The practice of firms to negotiate price and market decisions that limit competition © ©1999 South-Western College Publishing

23 What is a Cartel? A group of firms that collude to limit competition in a market by negotiating and accepting agreed-upon price and market shares © ©1999 South-Western College Publishing

24 Check out the most effective International Cartel ever assembled- © ©1999 South-Western College Publishing

25 What is the relationship between market concentration and price? A high concentration ratio in an industry translates into noncompetitive the prices © ©1999 South-Western College Publishing

26 What is the distinguishing feature of Oligopoly? Interdependence - either firm will not take an action unless it considers the reaction from the other firms © ©1999 South-Western College Publishing

27 Imagine 3 identical firms, A, B, and C in an industry. What happens If A raises price? B and C will not raise their price © ©1999 South-Western College Publishing

28 Imagine 3 identical firms in an industry A, B, C what happens If A raises price? B and C will lower their price © ©1999 South-Western College Publishing

29 Kinked Demand Curve P Q Starting price 29 © ©1999 South-Western College Publishing D MR MR Gap

30 What does the kinked demand curve illustrate? There is a great deal of price stability and nonprice competition is important © ©1999 South-Western College Publishing

31 How do firms in an Oligopoly set price? Most often they practice price leadership © ©1999 South-Western College Publishing

32 What is Price Leadership? A firm whose price decisions are tacitly accepted and followed by other firms in the industry © ©1999 South-Western College Publishing

33 What is an example nonprice competition? Brand multiplication when there are variations on one good to increase market share © ©1999 South-Western College Publishing

34 What is Game Theory? A theory of strategy ascribed to a firm’s behavior in oligopoly © ©1999 South-Western College Publishing

35 For more information about Game Theory - alroth.htmlhttp:// alroth.html © ©1999 South-Western College Publishing

36 What is the Prisoner’s Dilemma? A series of choices within a small group, each one’s choice of those presented will effect the outcome of the others © ©1999 South-Western College Publishing

An example of the Prisoner’s Dilemma is the Payoff Matrix Both Sam and Bill confess Sam confesses and Bill doesn’t Neither Sam nor Bill confesses

38 For a forum that induces the interactive Prisoner’s Dilemma check out - /~ann/pd.htmlhttp://serendip.brynmawr.edu /~ann/pd.html © ©1999 South-Western College Publishing

39 What is Price Discrimination? The practice of offering a specific good or service at different prices to different segments of the market © ©1999 South-Western College Publishing

40 What is Oligopoly? What concentration ratio constitutes an Oligopoly?What concentration ratio constitutes an Oligopoly? What is an Unbalanced Oligopoly? What is a Balanced Oligopoly? What is Collusion? What is a Cartel?

41 What is the distinguishing feature of Oligopoly?What is the distinguishing feature of Oligopoly? How do firms in an Oligopoly set price?How do firms in an Oligopoly set price? What is Game Theory? What is the Prisoner’s Dilemma? What is Price Discrimination?

42 ENDEND © ©1999 South-Western College Publishing