Description
Duopoly and oligopoly
Duopoly
Characteristics
• A limiting case of oligopoly where the number of sellers are two as against few in oligopoly. • Simplified form to understand oligopoly • Sellers decision are not independent of each other. • Price and output of one seller would affect the price and output of others. • Duopolist takes a decision he also takes into account the reaction of his rivals. • Mutual interdependence in policy making
Cournot’s Model of Duopoly
• Two firms having identical costs and homogeneous product.
– Assumptions:
• Two independent sellers producing and selling identical products (Mineral Water) • Zero cost of production • Each seller is rational • Buyers are large • Complete knowledge of demand conditions • Firm decides the output on the assumption that the rival will not change his output • The duopolist accepts the price at which he can sell his total output.
Model
• Firm A and B own a spring of mineral water. • Nature gift so zero cost of production • Straight line demand curve and each operate on the assumption that output of his competitor is given
Revenue, Cost D MRA MRB Units of Mineral Water
Criticism
• Cournot’s model leads to a stable equilibrium in which both firm A and B will produce 2/3 of the total demand and 1/3 of the demand will remain unsatisfied. • Shortcomings – Firms do not learn from mismanagement – Model is closed in nature – Each stage firm assumes that competitors will keep the quantity constant
• • •
Oligopoly A market structure in which a small number of interdependent firms compete. The approach we use to analyze competition among oligopolists is called game theory. Game theory The study of how people make decisions in situations where attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms. Key characteristics of all games: – Rules that determine what actions are allowable. – Strategies that players employ to attain their objectives in the game. – Payoffs that are the results of the interaction among the players’ strategies. Business strategy Actions taken by a business firm to achieve a goal, such as maximizing profits.
•
•
Prisoners Dilemma
• A payoff matrix is a table that shows the payoffs that each firm earns from every combination of strategies by the firms.
Suspect B Confess Don’t Confess Suspect A Confess 5,5 0,10 1,1 Don’t Confess 10,0
Main Features of Oligopoly
• • • • •
Small number of large sellers Interdependence Existence of Price Rigidity Presence of Monopoly element Advertising
Classification of Oligopoly Situation • Product Differentiation • Perfect Collision
– A cartel is a group of firms that colludes by agreeing to restrict output to increase prices and profits. – Centralized Cartel MR ? ? MC (AMA, OPEC) – Market sharing Cartel (Duopont and Imperial Chemicals)
• Imperfect Collision (Price Leadership Models)
– Price Leadership
• Dominant Firm • Low cost firm • Barometric firm
• Independent action by oligopoly
• • • •
The Organization of Petroleum Exporting Countries (OPEC) is an 11 member cartel. OPEC members meet periodically to agree on the quantities of oil each will produce. OPEC’s production quotas are intended to reduce oil production below the competitive level and to increase the profits of member countries. OPEC has had difficulty sustaining member quotas and oil prices over time. When prices are high each member has an incentive to stop cooperating and increase output beyond its quota.
Sweezy’s Kinky Demand Curve
• If an oligopolist’s competitors ignore its price changes, it faces demand curve D1. If an oligopolist’s competitors match its price changes it faces demand curve D2. If its competitors match its price cuts and ignore its price increases, then it will face a kinked demand curve (shown by the solid line in the figure) made up of demand curve D1 for prices above the current price and demand curve D2 for prices below the current price.
Because of the kink in the oligopolist’s demand curve, the marginal revenue curve will have a gap in it, shown by the vertical line between points A and B. As long as marginal cost stays within this gap and demand doesn’t change, the firm will continue to produce the same amount and charge the same price.
doc_576249988.pptx
Duopoly and oligopoly
Duopoly
Characteristics
• A limiting case of oligopoly where the number of sellers are two as against few in oligopoly. • Simplified form to understand oligopoly • Sellers decision are not independent of each other. • Price and output of one seller would affect the price and output of others. • Duopolist takes a decision he also takes into account the reaction of his rivals. • Mutual interdependence in policy making
Cournot’s Model of Duopoly
• Two firms having identical costs and homogeneous product.
– Assumptions:
• Two independent sellers producing and selling identical products (Mineral Water) • Zero cost of production • Each seller is rational • Buyers are large • Complete knowledge of demand conditions • Firm decides the output on the assumption that the rival will not change his output • The duopolist accepts the price at which he can sell his total output.
Model
• Firm A and B own a spring of mineral water. • Nature gift so zero cost of production • Straight line demand curve and each operate on the assumption that output of his competitor is given
Revenue, Cost D MRA MRB Units of Mineral Water
Criticism
• Cournot’s model leads to a stable equilibrium in which both firm A and B will produce 2/3 of the total demand and 1/3 of the demand will remain unsatisfied. • Shortcomings – Firms do not learn from mismanagement – Model is closed in nature – Each stage firm assumes that competitors will keep the quantity constant
• • •
Oligopoly A market structure in which a small number of interdependent firms compete. The approach we use to analyze competition among oligopolists is called game theory. Game theory The study of how people make decisions in situations where attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms. Key characteristics of all games: – Rules that determine what actions are allowable. – Strategies that players employ to attain their objectives in the game. – Payoffs that are the results of the interaction among the players’ strategies. Business strategy Actions taken by a business firm to achieve a goal, such as maximizing profits.
•
•
Prisoners Dilemma
• A payoff matrix is a table that shows the payoffs that each firm earns from every combination of strategies by the firms.
Suspect B Confess Don’t Confess Suspect A Confess 5,5 0,10 1,1 Don’t Confess 10,0
Main Features of Oligopoly
• • • • •
Small number of large sellers Interdependence Existence of Price Rigidity Presence of Monopoly element Advertising
Classification of Oligopoly Situation • Product Differentiation • Perfect Collision
– A cartel is a group of firms that colludes by agreeing to restrict output to increase prices and profits. – Centralized Cartel MR ? ? MC (AMA, OPEC) – Market sharing Cartel (Duopont and Imperial Chemicals)
• Imperfect Collision (Price Leadership Models)
– Price Leadership
• Dominant Firm • Low cost firm • Barometric firm
• Independent action by oligopoly
• • • •
The Organization of Petroleum Exporting Countries (OPEC) is an 11 member cartel. OPEC members meet periodically to agree on the quantities of oil each will produce. OPEC’s production quotas are intended to reduce oil production below the competitive level and to increase the profits of member countries. OPEC has had difficulty sustaining member quotas and oil prices over time. When prices are high each member has an incentive to stop cooperating and increase output beyond its quota.
Sweezy’s Kinky Demand Curve
• If an oligopolist’s competitors ignore its price changes, it faces demand curve D1. If an oligopolist’s competitors match its price changes it faces demand curve D2. If its competitors match its price cuts and ignore its price increases, then it will face a kinked demand curve (shown by the solid line in the figure) made up of demand curve D1 for prices above the current price and demand curve D2 for prices below the current price.
Because of the kink in the oligopolist’s demand curve, the marginal revenue curve will have a gap in it, shown by the vertical line between points A and B. As long as marginal cost stays within this gap and demand doesn’t change, the firm will continue to produce the same amount and charge the same price.
doc_576249988.pptx