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Class 21 Oligopoly

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5 views

Class 21 Oligopoly

Uploaded by

abhinavppradeep2
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Oligopoly

Oligopoly
• Oligopoly: there are few firms or sellers in the market
producing or selling a product.
• Features of Oligopoly:
1. Interdependence
2. Importance of Advertising and Selling Costs
3. Group Behaviour
4. Indeterminateness of Demand Curve Facing an Oligopolist
• Product Differentiation or Pure Oligopoly.
• Oligopoly with Product Differentiation or Differentiated
Oligopoly
VARIOUS APPROACHES TO DETERMINATION
OF PRICE AND OUTPUT UNDER OLIGOPOLY
•Ignoring Interdependence
•Predicting Reaction Pattern and Counter-moves of
Rivals
•Cooperative Behaviour : Forming a Collusion to
Maximise Joint Profits.
•Game Theory Approach to Oligopoly
COOPERATIVE VS. NON COOPERATIVE
BEHAVIOUR : BASIC DILEMMA OF OLIGOPOLY
• Cooperative Solution: Cartel
• The Non-Cooperative Equilibrium : Nash Equilibrium
Nash Equilibrium: Nash equilibrium is reached when
each firm thinks that its present strategy is the optimum
strategy given the present strategy of other firms. Set of
strategies or actions in which each firm does the best it
can given its competitors’ actions.
COLLUSIVE OLIGOPOLY : CARTEL AS A
COOPERATIVE MODEL
Market-Sharing Cartels
• Market-Sharing by Non-Price Competition: Under
market sharing by non-price competition, only a
uniform price is set and, the member firms are free to
produce and sell the amount of outputs which will
maximise their individual profits.
• Market-Sharing by Output Quota: The agreement
reached between the oligopolistic firms regarding
quota of output to be produced and sold by each of
them at the agreed price.
Competition
• Cournot model Oligopoly model in which firms produce
a homogeneous good, each firm treats the output of its
competitors as fixed, and all firms decide
simultaneously how much to produce. Equilibrium in
the Cournot model in which each firm correctly
assumes how much its competitor will produce and
sets its own production level accordingly.
• Stackelberg model(First mover advantage) Oligopoly
model in which one firm sets its output before other
firms do.
Price Competition
• Price Competition with Homogeneous Products—The
Bertrand Model
Bertrand model Oligopoly model in which firms
produce a homogeneous good, each firm treats the price
of its competitors as fixed, and all firms decide
simultaneously what price to charge.

• Price Competition with Differentiated Products


Competition vs Collusion: The Prisoners’
Dilemma
• Game Theory: the game theory seeks to explain what is
the rational course of action for an individual who is
faced with an uncertain situation, the outcome of which
depends not only upon his own actions but also upon
the actions of others who too confront the same
problem of choosing a rational strategic course of
action.
• Strategy: A strategy is thus a course of action or a policy
which a player or a participant in a game will adopt
during the play of the game.
• Noncooperative game :Game in which negotiation and
enforcement of binding contracts are not possible.
• Payoff matrix: Table showing profit (or payoff) to each
firm given its decision and the decision of its competitor.
• Prisoners’ dilemma: Game theory example in which two
prisoners must decide separately whether to confess to a
crime; if a prisoner confesses, he/she will receive a
lighter sentence and his/her accomplice will receive a
heavier one, but if neither confesses, sentences will be
lighter than if both confess.
Payoff matrix for prisoners’ dilemma
Pricing Game
Implications of Prisoners’ dilemma for
Oligopolistic pricing and Kinked Demand Curve
Price Signaling and Price Leadership
•Price signaling: Form of implicit collusion in which
a firm announces a price increase in the hope that
other firms will follow suit.
•Price leadership: Pattern of pricing in which one
firm regularly announces price changes that other
firms then match.
The Dominant Firm Model

•Dominant firm: Firm with a large share


of total sales that sets price to maximize
profits, taking into account the supply
response of smaller firms.

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