Managerial Economics in a Global Economy Oligopoly PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division.

Managerial Economics in a Global Economy

Oligopoly

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

of Thomson Learning. All rights reserved.

OligopolyFew sellers of a productNonprice competitionBarriers to entryDuopoly - Two sellersPure oligopoly - Homogeneous productDifferentiated oligopoly - Differentiated product

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

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Sources of OligopolyEconomies of scaleLarge capital investment requiredPatented production processesBrand loyaltyControl of a raw material or resourceGovernment franchiseLimit pricing

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Measures of OligopolyConcentration Ratios

4, 8, or 12 largest firms in an industry

Herfindahl Index (H)H = Sum of the squared market shares of all firms in an industry

Theory of Contestable MarketsIf entry is absolutely free and exit is entirely costless then firms will operate as if they are perfectly competitivePowerPoint Slides Prepared by

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Kinked Demand Curve Model

Proposed by Paul SweezyIf an oligopolist raises price, other firms will not follow, so demand will be elasticIf an oligopolist lowers price, other firms will follow, so demand will be inelasticImplication is that demand curve will be kinked, MR will have a discontinuity, and oligopolists will not change price when marginal cost changes

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

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Kinked Demand Curve Model

P2 MC’

P1 K MC

P3 MC”

0 Q2 Q1 Q3

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

of Thomson Learning. All rights reserved.

Kinked Demand Curve Model

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

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CartelsCollusion

Cooperation among firms to restrict competition in order to increase profits

Market-Sharing CartelCollusion to divide up markets

Centralized CartelFormal agreement among member firms to set a monopoly price and restrict outputIncentive to cheat

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Centralized Cartel

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Kartel yang terdiri atas 2 perusahaan mengahadapi fungsi permintaan sbb:Q = 120 – 10P, atau P = 12 – 0.1QFungsi biaya masing-masing perusahaan adalah:TC1 = 4Q1 + 0.1Q1

2

TC2 = 2Q2 + 0.1 Q22.

a. Tentukan harga monopolinya.B. Berapa Q yang harus dproduksi oleh masing-masing perusahaan?

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

of Thomson Learning. All rights reserved.

Kartel yang terdiri atas 2 perusahaan mengahadapi fungsi permintaan sbb:Q = 120 – 10P, atau P = 12 – 0.1QFungsi biaya masing-masing perusahaan adalah:Cari MR, MC1, MC2, ƩMCTR = PQ = (12-0.1Q)Q= 12Q – 0.1Q2

MR = 12 – 0.2QMC1 = 4 + 0.2Q1 Q1= -20 + 5MC1

MC2 = 2 + 0.2Q2 Q2= -10 + 5MC2

ƩMC = MC1 + MC2Q = -30 + 10ƩMC 10ƩMC = 30 + Q ƩMC = (30 + Q)/10 = 3 + 0.1Q

MR = ƩMC 12 – 0.2Q = 3 + 0.1Q 0.3Q = 9

Q = 9/0.3 =30 P = 12- 0.1Q = 12 – 0.1*30 = 9

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MR = 12 – 0.2Q = 12 – 0.2 * 30 = 6Q1MC1 = MR; 4 + 0.2Q = 60.2Q = 6-4=2Q = 2/0.2=10Q2MC2 = MR; 2 + 0.2Q = 60.2Q = 6-2=4Q = 4/0.2=20LABA:Perusahaan 1.AC1 = 4 + 0.1Q = 4 +0.1*10 = 4 +1 = 5TC = AC * Q = 5 *10 = 50TR = P*Q = 9*10 = 90Laba = TR – TC = 90 -50 =40Perusahaan 1.AC2 = 2 + 0.1Q = 2 + 0.1*20 = 2 + 2 = 4TC = AC * Q = 4 *20 = 80TR = P*Q = 9*20 = 180Laba = TR – TC = 180 -80 =100

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

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Price LeadershipImplicit CollusionPrice Leader (Barometric Firm)

Largest, dominant, or lowest cost firm in the industryDemand curve is defined as the market demand curve less supply by the followers

FollowersTake market price as given and behave as perfect competitors

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Price Leadership

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Harmful Effects of Oligopoly

Price is usually greater then long-run average cost (LAC)Quantity produced usually does correspond to minimum LACPrice is usually greater than long-run marginal cost (LMC)When a differentiated product is produced, too much may be spent on advertising and model changes

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Sales Maximization ModelProposed by William BaumolManagers seek to maximize sales, after ensuring that an adequate rate of return has been earned, rather than to maximize profitsSales (or total revenue, TR) will be at a maximum when the firm produces a quantity that sets marginal revenue equal to zero (MR = 0)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

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Sales Maximization Model

MR = 0 whereQ = 50

MR = MC whereQ = 40

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division

of Thomson Learning. All rights reserved.