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

Oligopoly  Bertrand’s model  Rivals keep price constant  Price war

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

Kinked demand for a firm under oligopoly Rs Q O P1P1 Q1Q1 D

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

The MR curve Rs Q O P1P1 Q1Q1 D  AR a MR

Rs Q O P1P1 Q1Q1 MR a b D  AR The MR curve

Rs Q O P1P1 Q1Q1 MR a b D  AR The MR curve

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

Price Stability in kinked demand curve Rs Q O P1P1 Q1Q1 MC3 MC 1 MR a b D  AR MC 2 More Elastic More In elastic

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

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

 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 Q O Industry D  AR

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

Rs Q O Industry D  AR P1P1 Industry MC Q1Q1 Industry MR Profit-maximising cartel

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

Price Leadership: Dominant firm market leader X P PCPC P1P1 P0P0 P3P3 P1P1 P0P0 X MR DLDL XX3 MC AC D1D1 P2P2 X2 P2P2 P3P3 S1S1 A B

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

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

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

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

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

A price leader aiming to maximise profits for a given market share Rs Q O PLPL MC MR leader AR  D leader QLQL l AR  D market

A price leader aiming to maximise profits for a given market share Rs Q O AR  D market PLPL MC QTQT MR leader AR  D leader QLQL l t

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

 Tacit collusion  price leadership: dominant firm  price leadership: barometric  other forms of tacit collusion: rules of thumb oaverage cost pricing oprice benchmarks Oligopoly

 Thank you…………………..