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 P* = 3 Quantity Market price Demand: p=5-q c=1 q* = 2 

07/14/04B189 - Simon Rodan4 LRAC # of firms Price Bertrand model of competition

The Oil Super Majors Sales ($B) Net Income ($B)ROE Royal Dutch Shell475265% Exxon % BP377175% Chevron % Total SA222146% Data are for FY2011

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

Cournot’s Duopoly Prediction P* = 2.33 Quantity Market price Demand: p=5-q c=1 q* = 2.66     1 and 2 =3.54 Simulation

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

07/14/04B189 - Simon Rodan9 LRAC # of firms Potential price Cournot model of competition (quantity)

Firm Size Industry Profile

Industry concentration Industries with few firms are ‘concentrated’ Industries with many firms are ‘fragmented’ However, most industries have both large and small firms

Some more examples

Assessing concentration Four Firm Concentration Ratio (CR4) –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)