Oligopoly

OLIGOPOLY Key features of oligopoly barriers to entry interdependence of firms incentives to compete 4

OLIGOPOLY Non-collusive oligopoly: game theory 6

Profits for firms A and B at different prices X’s price £2.00 £1.80 A B £5m for Y £12m for X £2.00 £10m each Y’s price C D £12m for Y £5m for X £1.80 £8m each

OLIGOPOLY Non-collusive oligopoly: game theory simple dominant strategy games 6

Profits for firms A and B at different prices X’s price £2.00 £1.80 A B £5m for Y £12m for X £2.00 £10m each Y’s price C D £12m for Y £5m for X £1.80 £8m each

OLIGOPOLY Non-collusive oligopoly: game theory alternative strategies: maximax and maximin simple dominant strategy games the prisoners’ dilemma 6

A B C D The prisoners' dilemma Amanda's alternatives Nigel's Not confess Confess A B Nigel gets 10 years Amanda gets 3 months Not confess Each gets 1 year Nigel's alternatives C D Nigel gets 3 months Amanda gets 10 years Each gets 3 years Confess

OLIGOPOLY Non-collusive oligopoly: game theory -simple dominant strategy games the prisoners’ dilemma Nash equilibrium 6

A decision tree (1) B1 (2) A (3) B2 (4) Boeing –£10m Airbus –£10m 500 seater Airbus decides B1 500 seater 400 seater Boeing +£30m Airbus +£50m (2) Boeing decides A 400 seater Boeing +£50m Airbus +£30m (3) 500 seater Airbus decides B2 400 seater Boeing –£10m Airbus –£10m (4)

OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour The Cournot model of duopoly assumption that rival will produce a given quantity 6

The Cournot model of duopoly £ MCA DM DA1 Firm A believes that firm B will produce QB1. O QB1 Quantity (a) Firm A’s profit-maximising position

OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour The Cournot model of duopoly assumption that rival will produce a given quantity profit-maximising price and output for firm A 6

The Cournot model of duopoly £ MCA Firm A’s profit-maximising output and price are QA1 and PA. MRA1 PA1 QA1 DM DA1 O QB1 Quantity (a) Firm A’s profit-maximising position

OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour The Cournot model of duopoly assumption that rival will produce a given quantity profit-maximising price and output for firm A reaction functions of firms A and B 6

The Cournot model of duopoly Firm A’s reaction function for each assumed output of B £ RA MCA Firm B’s reaction function for each assumed output of A Firm B’s output PA1 RB QB1 x QA1 DM DA1 MRA1 O QA1 O QB1 Quantity Firm A’s output (a) Firm A’s profit-maximising position (b) The two firms’ reaction functions

OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour The Cournot model of duopoly assumption that rival will produce a given quantity profit-maximising price and output for firm A reaction functions of firms A and B Cournot equilibrium 6

The Cournot model of duopoly Equilibrium at point e, where the two reaction functions cross £ RA MCA Firm B’s output PA1 e RB QBe QAe QB1 x DM DA1 MRA1 O QA1 O QA1 QB1 Quantity Firm A’s output (a) Firm A’s profit-maximising position (b) The two firms’ reaction functions