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Oligopoly
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Oligopoly
Oligopoly
A few large producers
Homogeneous oligopoly
Differentiated oligopoly
Limited control over price
Entry barriers
Mergers
LO
13-2
Oligopoly
A few large producers
Each firm has a large market share
The firms are interdependent
The firms have an incentive to collude
When a small number of firms share a
market, they can increase their profit by
forming a cartel and acting like a monopoly.
A cartel is a group of firms acting together to
limit output, raise price, and increase
economic profit.
13-3
Oligopoly
Barriers to entry
Scale economies may make it unprofitable for
more than a few firms to coexist in the market;
patents or access to a technology may exclude
potential competitors;
the need to spend money for name recognition
and market reputation may discourage entry
by new firms; and
Incumbent firms may take strategic actions to
deter entry.
13-4
13-5
Oligopoly
Managing an oligopolistic firm is
complicated because pricing, output,
advertising, and investment
decisions involve important strategic
considerations, which can be highly
complex.
13-6
Oligopoly
Interdependence
Profit earned by each firm depends on
the firms own actions and on the
actions of the other firms.
Each firm must consider how the other
firms will react to its decision and
influence its profit.
13-7
Equilibrium in an Oligopolistic
Market
In an oligopolistic market, however, a firm sets
price or output based partly on strategic
considerations regarding the behavior of its
competitors.
With some modification, the underlying principle to
describe an equilibrium when firms make decisions
that explicitly take each others behavior into
account is the same as the equilibrium in
competitive and monopolistic markets:
When a market is in equilibrium, firms are doing the
best they can and have no reason to change their
price or output.
13-8
Oligopolistic Industries
Four-firm concentration ratio
40% or more to be an oligopoly
Shortcomings
LO
Localized markets
Interindustry competition
Import competition
Dominant firms
13-9
(3)
Herfinda
hl
Index
Primary copper
99
ND
Cane sugar
refining
95
(2)
(1)
Industry
4-Firm
Concentrati
on Ratio
(3)
Herfinda
hl
Index
Petrochemicals
80
2,535
ND
Breakfast cereals
80
2,426
79
2,447
(2)
(1)
Industry
Cigarettes
98
ND
Small-arms
ammunition
Household
laundry
equipment
98
ND
Primary aluminum
77
2,250
76
2,015
Household
refrigerators and
freezers
92
ND
Beer
90
ND
75
2,258
Glass containers
87
2,507
Tires
73
1,540
Household vacuum
cleaners
71
1,519
Alcohol distilleries
70
13-10
1,915
Electronic
computers
87
ND
Oligopoly Behavior
Oligopolies display strategic
behavior
Mutual interdependence
Collusion
Incentive to cheat
Game theory
Prisoners dilemma
LO
13-11
Game Theory
Analyzes the choices made by rival
firms, people, and even governments
when they are trying to maximize
their own well-being while anticipating
and reacting to the actions of others
in their environment.
Dominant strategy
In game theory, a strategy that is best no
matter what the opposition does.
13-12
Game Theory
THE PRISONERS DILEMMA
A game in which the players are prevented from
cooperating and in which each has a dominant strategy
that leaves them both worse off than if they could
cooperate.
Equilibrium - Occurs when each player takes the best
possible action given the action of the other player.
Nash equilibrium is an equilibrium in which each
player takes the best possible action given the action of
the other player.
The equilibrium of the prisoners dilemma is not the
best outcome for the players.
players
13-13
2 competitors
2 price
strategies
Each strategy
has a payoff
matrix
Greatest
combined
profit
Independent
actions
stimulate a
response
LO
$12
Low
B
$15
High
$12
C
Low
$15
$6
$6
$8
$8
13-14
Independently
lowered prices
in expectation
of greater
profit leads to
worst
combined
outcome
Eventually low
outcomes
make firms
return to
higher prices.
LO
$12
Low
B
$15
High
$12
C
Low
$15
$6
$6
$8
$8
13-15
Game Theory
Nash
Equilibrium
13-17
Game Theory
Game Theory
13-19
LO
Kinked-demand curve
Collusive pricing
Price leadership
Reasons for 3 models
Diversity of oligopolies
Complications of interdependence
13-20
Kinked-Demand Theory
Noncollusive oligopoly
Uncertainty about rivals reactions
Rivals match any price change
Rivals ignore any price change
Assume combined strategy
Match price reductions
Ignore price increases
LO
13-21
Kinked-Demand Curve
Rivals ignore
price increase
P0
P0
D2
MR2
Rivals match g
price decrease
Q0
LO
D2
D1
MR1
MR2
e
f
MC1
MC2
g
D1
Q0
MR1
13-22
Kinked-Demand Curve
Criticisms
Explains inflexibility, not price
Prices are not that rigid
Price war
LO
13-23
MC
ATC
P0
A0
Economic
profit
MR=MC
MR
Q0
LO
13-24
Overt Collusion
A cartel is a group of firms or
nations that collude
Formally agreeing to the price
Sets output levels for members
Collusion is illegal in the United
States
OPEC
LO
13-25
Obstacles to Collusion
LO
13-26
13-27
LO
13-28
LO
13-29
LO
Advertising Spending
Millions of $
$4,971.5
General Motors
3,055.7
Verizon
2,523.0
Comcast
2,465.4
AT&T
2,359.0
JP Morgan Chase
2,351.8
Ford Motor
2,141.3
American Express
2,125.3
LOral
2,124.6
13-30
LO
13-31
13-32
Internet Oligopolies
The Internet became accessible to the
average person in the mid 1990s
Today it is dominated by a few very large
firms
Google, Facebook, Amazon, Microsoft, Apple
Not satisfied with just revenues generated
in their respective sectors
Compete for advertising $s
Compete with their own electronic devices
13-33