Chapter 9 slide 1 OLIGOPOLY A Small Number of Large Firms Dominate the Market. The firms ’ fortunes are interdependent. Each firm ’ s actions affect the profits of its few rivals. Porter ’ s Five-Forces Model Internal Rivalry Substitutes & Complements Entry Buyer Power Supplier Power

9.2 OLIGOPOLY A Small Number of Firms Dominate the Market. The Degree of Market Dominance is Measured by the Concentration Ratio. CR = Percentage of Sales of the top 4 (8 or 20) Firms. Good or ServiceConcentration Ratio 4 Firms 8 Firms Glass Containers Beer Breakfast Foods Motor Vehicles Tires Book Stores Snack Foods Motion Pictures Fast Food Lawn Equipment Air Flights 34 51

Dominant Firm acting as Price Leader 9.3 Industry Demand D Supply Curve for Small Firms S Leader ’ s Net Demand d MR MC P* Q* QSQS Leader produces Q*, Small firms produce Q S.

MR 1 = [30 - Q 2 ] – 2Q 1 = 6. Thus, Q 1 = Q 2. QUANTITY COMPETITION 9.4 The Cournot Model. Two Firms supply a market, where Demand is: P = 30 – Q 1 - Q 2. For each, LAC = LMC = $6/unit. Set MR = MC Similarly, Q 2 = Q 1. In Equilibrium, Q 1 = Q 2 = 8. The greater is the rival ’ s output then the less is your own output. In turn, P = 30 – 16 = $14, and Each firm ’ s profit is: (14 – 6)(8) = $64.

The Cournot Model (continued).9.5 For N Firms, P = 30 – Q 1 - Q 2 – Q 3 … - Q N. MR 1 = [30 - Q Q N ] – 2Q 1 = 6. Thus, Q 1 = (Q 2 + … Q N ). Total Output LAC = LMC = $6 $30 Firm ’ s produce identical outputs, so, Q i = (N-1)Q i. So, Q 1 = Q 2 = … Q N = 24/(N+1). N Q Total P $18 $14 $12 $10 $7.5

STABLE PRICES w/ KINKED DEMAND 9.6 Demand MC P* Q* MC With kinked demand, price is stable even as costs change. Output Price MR

7, 7 A Price War If Both charge $8, Each Sells 2.5 M units. If Both charge $6, Each Sells 3.5 M units. If One charge $8 and the Other $6, They Sell 1.25 M and 6 M units. P 2 = $8 P 2 = $6 P 1 = $8 10, 10 P 1 = $6 5, 12 12, 5 What is the Result of Strict Competition? Low Prices: (7, 7) MC = $6 9.7

7, 7 A Price War (Revisited) If Both charge $8, Each Sells 2.5 M units. If Both charge $6, Each Sells 3.5 M units. What if there is strong Brand Allegiance. So, if One charge $8 and the Other $6, They sell 2 M and 4 M units. P 2 = $8 P 2 = $6 P 1 = $8 10, 10 P 1 = $6 8, 8 Now, what is the Result of Competition? High Prices: (10, 10) ! MC = $6 9.8