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Conditions For Oligopoly: - Typical Number of Firms Is Between 2 and 10. - Products Can Be Identical or Differentiated

This document discusses different types of oligopoly market structures: 1) Sweezy oligopoly is characterized by a few firms producing differentiated products, where each firm believes rivals will cut prices in response to a price reduction but not raise prices in response to an increase. 2) Cournot oligopoly has a few firms producing differentiated or homogeneous products, where each firm believes rivals will hold output constant if it changes its own output. 3) Stackelberg oligopoly features a leader firm that chooses output first, with follower firms then choosing outputs to maximize profits given the leader's output. 4) Bertrand oligopoly involves a few firms producing identical products engaging in price competition to react optimally

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Kentaro Panergo Numasawa
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44 views

Conditions For Oligopoly: - Typical Number of Firms Is Between 2 and 10. - Products Can Be Identical or Differentiated

This document discusses different types of oligopoly market structures: 1) Sweezy oligopoly is characterized by a few firms producing differentiated products, where each firm believes rivals will cut prices in response to a price reduction but not raise prices in response to an increase. 2) Cournot oligopoly has a few firms producing differentiated or homogeneous products, where each firm believes rivals will hold output constant if it changes its own output. 3) Stackelberg oligopoly features a leader firm that chooses output first, with follower firms then choosing outputs to maximize profits given the leader's output. 4) Bertrand oligopoly involves a few firms producing identical products engaging in price competition to react optimally

Uploaded by

Kentaro Panergo Numasawa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Conditions for Oligopoly

Conditions for Oligopoly


• Oligopoly market structures are characterized
by only a few firms, each of which is large
relative to the total industry.
– Typical number of firms is between 2 and 10.
– Products can be identical or differentiated.
• An oligopoly market composed of two firms is
called a duopoly.
• Oligopoly settings tend to be the most difficult
to manage since managers must consider the
likely impact of his or her decisions on the
decisions of other firms in the market.
9-1
Profit Maximization in Four Oligopoly Settings

Sweezy Oligopoly
Sweezy oligopoly characteristics:
• There are few firms in the market serving
many consumers.
• The firms produce differentiated products.
• Each firm believes its rivals will cut their prices
in response to a price reduction but will not
raise their prices in response to a price
increase.
• Barriers to entry exist.

9-2
Profit Maximization in Four Oligopoly Settings

Cournot Oligopoly
Cournot oligopoly characteristics
• There are few firms in the market serving
many consumers.
• The firms produce either differentiated or
homogeneous products.
• Each firm believes rivals will hold their output
constant if it changes its output.
• Barriers to entry exist.

9-3
Profit Maximization in Four Oligopoly Settings
Cournot Oligopoly: Reaction
Functions
• Consider a Cournot duopoly. Each firm makes
an output decision under the belief that is rival
will hold its output constant when the other
changes its output level.
– Implication: Each firm’s marginal revenue is
impacted by the other firms output decision.
• The relationship between each firm’s profit-
maximizing output level is called a best-
response or reaction function.

9-4
Profit Maximization in Four Oligopoly Settings

Cournot Oligopoly:
Reaction Functions Formula

9-5
Profit Maximization in Four Oligopoly Settings

Cournot Oligopoly: Equilibrium


• A situation in which neither firm has an
incentive to change its output given the other
firm’s output.

9-6
Profit Maximization in Four Oligopoly Settings

Cournot Oligopoly: Isoprofit Curves


• A function that defines the combinations of
outputs produced by all firms that yield a
given firm the same level of profits.

9-7
Profit Maximization in Four Oligopoly Settings

Cournot Oligopoly: Collusion


• Markets with only a few dominant firms can
coordinate to restrict output to their benefit at
the expense of consumers.
– Restricted output leads to higher market prices.
• Such acts by firms is known as collusion.
• Collusion, however, is prone to cheating
behavior.
– Since both parties are aware of these incentives,
reaching collusive agreements is often very difficult.

9-8
Profit Maximization in Four Oligopoly Settings

Stackelberg Oligopoly
Stackelberg oligopoly characteristics:
• There are few firms serving many consumers.
• Firms produce either differentiated or
homogeneous products.
• A single firm (the leader) chooses an output
before all other firms choose their outputs.
• All other firms (the followers) take as given the
output of the leader and choose outputs that
maximize profits given the leader’s output.
• Barriers to entry exist.

9-9
Profit Maximization in Four Oligopoly Settings
Stackelberg Oligopoly:
Equilibrium Output Formulae

9-10
Profit Maximization in Four Oligopoly Settings

Bertrand Oligopoly
Bertrand oligopoly characteristics
• There are few firms in the market serving many
consumers.
• Firms produce identical products at a constant
marginal cost.
• Firms engage in price competition and react
optimally to prices charged by competitors.
• Consumers have perfect information and there
are no transaction costs.
• Barriers to entry exist.

9-11
Profit Maximization in Four Oligopoly Settings

Bertrand Oligopoly: Equilibrium

9-12
Contestable Markets

Contestable Markets
• Contestable markets involve strategic
interaction among existing firms and potential
entrants into a market.
• A market is contestable if:
– All producers have access to the same technology.
– Consumers respond quickly to price changes.
– Existing firms cannot respond quickly to entry by
lowering price.
– There are no sunk costs.
• If these conditions hold, incumbent firms have
no market power over consumers.
9-13

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