Session 18 Oligopoly Market

Session 18 Oligopoly Market - Transcript

Session 18

Oligopoly Market

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Definitions
Oligopoly is a market structure in which there are only a few firms each of which is large relative to the total industry Monopolistic competition is a market with many firms selling similar products with some differentiation
The difference relates to how much rivalry there is among firms
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Topics of Discussion
Oligopoly
Duopoly Barriers to Entry Price Rigidity Without Collusion Price Leadership
Efficient firm Dominant firm

Perfect Collusion Cartels
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Several economic theories have attempted to define the optimum strategy in a duopolistic competition price war Most scenarios in the long run result in both competitors losing and one or both going out of business In this situation a strategy of collusion or cooperative pricing for mutual benefit is desirable
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Duopoly An Oligopoly with only two competitors

Barriers to Market Entry
Entry limit pricing Excess capacity and economies of scale Capital requirements Product differentiation or brand recognition Government controls Sales and distribution networks
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Price Rigidity Without Collusion
The kinked demand curve occurs when the competing firms follow a price decrease but not an increase The kink is the equilibrium point Firms with differing costs will operate at the same quantity price
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Price Leadership
Efficient Firm
When the lead firm changes price others will follow shortly Firm b has maximum profit at Pb but must adjust to Pa to sustain market share
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Price Leadership Dominant Firm
The dominant share of the market is so large that competitors must accept the set market price as in perfect The demand curve competition
for the dominant S MC firm is obtained by subtracting the quantity supplied by small firms from the total market quantity demanded The dominant firm selects Pe which is the MR curve for small firms who supply QS
s s

Dominant Firm

Entire Market

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QL Qs QM
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The Cartel Perfect Collusion
To maximize profit cartel managers must allocate production based on the rule of marginal cost which dictates that MR MCA MCB MCn for all participants This is the ideal situation in the short run

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