1. Oligopoly

2. OLIGOPOLY Key features of oligopoly barriers to entry
interdependence of firms
incentives to compete 4

3. OLIGOPOLY
Non-collusive oligopoly: game theory 6

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

5. OLIGOPOLY Non-collusive oligopoly: game theory
simple dominant strategy games 6

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

7. OLIGOPOLY Non-collusive oligopoly: game theory
alternative strategies: maximax and maximin
simple dominant strategy games
the prisoners’ dilemma 6

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

9. OLIGOPOLY Non-collusive oligopoly: game theory
-simple dominant strategy games
the prisoners’ dilemma
Nash equilibrium 6

10. A decision tree (1) B1 (2) A (3) B2 (4) Boeing –£10m Airbus –£10m
500 seater
Airbus
decides B1
500 seater
400 seater
Boeing +£30m
Airbus +£50m
(2)
Boeing
decides A
400 seater
Boeing +£50m
Airbus +£30m
(3)
500 seater
Airbus
decides B2
400 seater
Boeing –£10m
Airbus –£10m
(4)

11. OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour
The Cournot model of duopoly
assumption that rival will produce a given quantity 6

12. The Cournot model of duopoly
MCA DM
DA1
Firm A believes that firm B will produce QB1. O
QB1
Quantity
(a) Firm A’s profit-maximising position

13. OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour
The Cournot model of duopoly
assumption that rival will produce a given quantity
profit-maximising price and output for firm A 6

14. The Cournot model of duopoly
MCA
Firm A’s profit-maximising output and price are QA1 and PA.
MRA1
PA1
QA1 DM
DA1 O
QB1
Quantity
(a) Firm A’s profit-maximising position

15. OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour
The Cournot model of duopoly
assumption that rival will produce a given quantity
profit-maximising price and output for firm A
reaction functions of firms A and B 6

16. The Cournot model of duopoly
Firm A’s reaction function for each assumed output of B RA
MCA
Firm B’s reaction function for each assumed output of A
Firm B’s output
PA1 RB
QB1 x
QA1 DM
DA1
MRA1 O
QA1 O
QB1
Quantity
Firm A’s output
(a) Firm A’s profit-maximising position
(b) The two firms’ reaction functions

17. OLIGOPOLY Non-collusive oligopoly: assumptions about rivals’ behaviour
The Cournot model of duopoly
assumption that rival will produce a given quantity
profit-maximising price and output for firm A
reaction functions of firms A and B
Cournot equilibrium 6

18. The Cournot model of duopoly
Equilibrium at point e, where the two reaction functions cross RA
MCA
Firm B’s output
PA1 e RB
QBe
QAe
QB1 x DM
DA1
MRA1 O
QA1 O
QA1
QB1
Quantity
Firm A’s output
(a) Firm A’s profit-maximising position
(b) The two firms’ reaction functions