Soft Drinks Breakfast Cereals Tobacco Automobiles Reasons economies of scale government barriers advertising Oligopoly: a market with just a few firms 15 Oligopoly

Quantity Price ($) Duopolist Demand Market demand Curve is less steep: Greater price elasticity of demand Duopolist demand Competitor price = $350 Two firms with the same price split the market Quantity drops to zero if price is too high.

Quantity Price ($) Change in Competitor Price Duopolist demand Competitor price = $350 Shift in demand whenever competitor raises its price Duopolist demand Competitor price = $450

Quantity Price ($) Market demand AC = MC Monopoly or Cartel Total quantity = 125 Price = $425 Total profit = $15,625 MR

Quantity Price ($) Duopolist Decision Firm B Demand Firm A price = $350 AC = MC Firm B:quantity = 100 price = $350 profit = $5,000 Firm A:profit = $5,000 MR

Quantity Price ($) Duopolist Decision Firm B Demand Firm A price = $400 AC = MC MR Profit Firm B:quantity = 138 price = $369 profit = $9,522 Firm A:profit = $2,813

Quantity Price ($) An Alternative Decision Firm B Demand Firm A price = $400 AC = MC Profit Firm B:quantity = 75 price = $400 profit = $7,500 Firm A:profit = $7,500

$5,000 B $8,750 B $5,000 B A $5,000 A $0 A $8,750 A $7,500 $0 B $8,750 B $7,500 B Price = $350 Price = $400 Price = $350Price = $400 Firm B Firm A A Payoff Matrix

$5,000 B $8,750 B $5,000 B A $5,000 A $0 A $8,750 A $7,500 $0 B $8,750 B $7,500 B $350 $400 $350$400 Firm B Firm A A Payoff Matrix A $10,000 A $11,250 $0 B $3,125 B $11,250 B A $0 A $3,125 $10,000 B $11,250 B A $7,812 B $425

Avoiding the Dilemma: Price Matching  Firm A sets a high price  Firm A commits to match a lower price by Firm B  Firm B has no incentive to underprice  Firm B sets a high price

Repeated Pricing and Retaliation for Underpricing  Firm A retaliates if Firm B underprices Firm A sets price = $400 (If Firm B does the same, both firms will make $7500.) Firm B sets price = $350 (Firm B makes $8750, Firm A makes $0.) Firm A retaliates!

Quantity Price ($) Firm B Demand Firm A price = $325 AC = MC MR Firm B:quantity = 81 price = $341 profit = $3,321 Firm A:profit = $3,400 Firm A Retaliates: Sets Price = $325

Quantity Price ($) Kinked Demand Curve Firm B Deman d AC = MC MR Firm B loses customers quickly by increasing price…  Firm A sets a price of $400 and will retaliate if Firm B undercuts … but gains little by lowering its price.

Quantity Price ($) Algebra, if you’re interested Duopolist Demand Q B = P A – 2 P B if P A =$350 Q B = 800 – 2 P B Optimal Quantity Q B = 0.75 P A – if P A =$350 Q B = 100 P B = P A –.5 Q B REV B = Q B x P B = Q B +.75 P A Q B –.5 Q B 2 MR B = P A – Q B