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Oligopoly

PRESENTED TO
SIR NAUMAN
PRESENTED BY
NAVEEDA SAHREEN
BBA(7TH SEM)
Oligopoly
• A few large producers
• Homogeneous or
differentiated products
• Control over price
–Mutual interdependence
–Strategic behavior
• Entry barriers
• Mergers
11-2
Game Theory

RareAir’s Price Strategy


• Independently High Low
lowered prices

Uptown’s Price Strategy


in expectation A B
$12 $15
of greater profit
leads to the High
worst $12 $6
combined
outcome
C D
• Eventually low $6 $8
outcomes make Low
firms return to $15 $8
higher prices

11-3
Game Theory

• Mutual interdependence
–Pricing policy
• Collusion
–Enhances profit
• Incentive to cheat
• Prisoner’s dilemma

11-4
Three Oligopoly Models
• Kinked-demand curve
• Collusive pricing
• Price leadership
• Why three models?
–Diversity of oligopolies
–Complications of interdependence

11-5
Kinked-Demand Curve
• Noncollusive oligopoly
• Strategies
–Match price changes
–Ignore price changes
• Combined strategy
• Price inflexibility
• The kinked-demand curve
11-6
Kinked-Demand Curve
Competitor and rivals strategize versus each other
Consumers effectively have 2 partial demand curves
and each part has its own marginal revenue part

Rivals Ignore
Price Increase

Price and Costs


D2 MC1
e e
P0 P0
Price

MR2 f
f
D2 MC2

MR2
Rivals Match g
Price Decrease g
D1 D1
0 Q0 MR1 0 Q0 MR1
Quantity Quantity
Resulting in a kinked-demand curve
to the consumer – price and output
are optimized at the kink
11-7
Kinked-Demand Curve

• Criticisms of the model


–How does price get to P0
–Explains inflexibility, not price
–Prices are not that rigid
–Price wars

11-8
Cartels and Other Collusion
• Price and output
–Joint profit maximization

MC Effectively Sharing
The Monopoly Profit
Price and Costs

P0 ATC

A0

MR=MC
Economic
Profit MR D

Q0
Quantity
11-9
Cartels and Other Collusion
• Covert collusion
–Tacit understandings
• Obstacles to collusion
–Demand and cost differences
–Number of firms
–Cheating
–Recession
–Potential entry
–Legal obstacles: antitrust law
11-10
Price Leadership Model

• Leadership tactics
• Infrequent price changes
• Communications
• Limit pricing
• Breakdowns in price leadership:
–Price wars

11-11
Advertising

• Prevalent in monopolistic
competition and oligopoly
• Capture market share
• Better than a price cut
• Information for consumers
• Manipulation

11-12
Oligopoly and Efficiency
• Not productively efficient
• Not allocatively efficient
• Tendency to share the monopoly
profit
• Qualifications
–Increased foreign competition
–Limit pricing
–Technological advance
11-13

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