Oligopoly. Two examples of oligopoly Market shares of the largest brewers Market shares of the largest brewers.

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Presentation transcript:

Oligopoly

Two examples of oligopoly

Market shares of the largest brewers Market shares of the largest brewers

Market shares of the largest brewers Market shares of the largest brewers

Yom Kippur War: Arab oil embargo First oil from North Sea Revolution in Iran Iraq invades Iran OPEC’s first quotas Cease-fire in Iran-Iraq war Recession in Far East Iraq invades Kuwait New OPEC quotas World-wide recovery World-wide slowdown Impending war with Iraq Oil prices

Yom Kippur War: Arab oil embargo First oil from North Sea Revolution in Iran Iraq invades Iran OPEC’s first quotas Cease-fire in Iran-Iraq war Recession in Far East Iraq invades Kuwait New OPEC quotas World-wide recovery World-wide slowdown Impending war with Iraq Oil prices

Oligopoly A profit-maximising cartel

£ Q O Industry D  AR Profit-maximising cartel

£ Q O Industry D  AR Industry MC Industry MR Q1Q1 P1P1 Profit-maximising cartel

Oligopoly Price leadership (assumption of fixed market share) Price leadership (assumption of fixed market share)

£ Q O MR leader AR  D leader AR  D market Price leader aiming to maximise profits for a given market share Assume constant market share for leader

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

Oligopoly Game theory

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

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

Oligopoly A decision tree

Boeing decides 500 seater 400 seater A decision tree Boeing –£10m Airbus –£10m (1) Boeing +£30m Airbus +£50m (2) Boeing +£50m Airbus +£30m (3) Boeing –£10m Airbus –£10m (4) Airbus decides B2B2 Airbus decides B1B1 A

Oligopoly Kinked demand curve theory

Kinked demand for a firm under oligopoly £ Q O P1P1 Q1Q1 Current price and quantity give one point on demand curve

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

£ Q O P1P1 Q1Q1 MC 2 MC 1 MR a b D  AR Stable price under conditions of a kinked demand curve