1. L22
Oligopoly

2. Market structure pall Market structures:
Oligopoly – industry with 2 or more large sellers.
Intermediate level of fixed cost
Have market power (but smaller than monopoly)
Also: oligopsony and bilateral oligopoly N 1 2
3-10
10-…
Name
pall

3. Oligopolies in practice
Examples of oligopolies in the USA:
- accounting & audit services, tobacco, beer, aircraft, military equipment, motor vehicle, film and music recording industries
Inefficiency and regulation
Federal Trade Commission

4. Oligopolies in practice
Market share
Industry is legally recognized as oligopolistic
1. concentration ratio “big four”>40%
(share of top 4 firms in the market)
Concentrated industry if CR>40%
2. HERFINDAHL-HIRSCHMAN Index (HHI)
Moderately concentrated industries HHI>1000
Concentrated industry HHI>1800

5. IO - Models Strategic environment – harder than before
Careful about timing and strategy
Quantities
chosen simultaneously (Cournot)
- leader and follower (Stackelberg)
Prices (Bertrand)
When goods are not homogenous - Monopolistic competition

6. Cournot Model - Assumptions
Homogenous good
2 firms (duopoly)
Aggregate supply
Market price
chosen simultaneously
Cost function
Maximize profit

7. Firm 1: Best response to

8. Best response: Geometry

9. Cournot-Nash Equilibrium:
Cournot equilibrium :
Output of each firm is a best response to the output of the other firm
No firm has incentives to deviate, given production of the other firm.

10. Equilibrium (Example)

11. Nash Equilibrium: Geometry

12. Incentives to collude
Are there profit incentives for both firms to “cooperate” by lowering their output levels?
If yes than collusion.
Firms that collude form a cartel.
Good for firms, bad for consumers and efficiency (DWL)
Under what condition cartels are stable?

13. Collusion

14. Collusion: Geometry

15. Incentives to collude In long run reputation helps!
- see movie ``Informant’’
Cartels are hard to sustain if:
Only short run interactions
Imperfect monitoring of price
Alternative: Mergers
- Problem: Federal Trade Commission

16. Cournot with N firms