Oligopoly Competition Pricing, and Different Models

Less Price Is Always Wise

Mithilesh Trivedi

C mpetition O

Olig

poly• Pricing• Cooperative vs. Non-cooperative Behaviour• Game Theory• Cournot’s Model• Kinked Demand Curve

A market in which a two-three large sellers control most of the production of a good or service and they work together on setting prices

ligopolyS e l l e r s A r e R u l e r s

Conditions of an Oligopoly

a. Very few Sellers that control the entire market

b. Products may be differentiated or identical (but they are usually standardized)

c. Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices

d. The actions of one affects all the producers

e. Collusion = an agreement to act together or behave in a cooperative manner

More Competition Less Competition

B ARRIE RS Structural Barriers• High capital cost • Economies of scale• Product differentiation and brand loyalty• High switching cost• Ownership/control of key factors or outlets

Institutional Barriers• Patents• Regulations

Strategic Barriers• Limit pricing• Excess capacity• Vertical integration • Sleeping patents• Predatory pricing• Tying sales

Oligopoly Curve

Pricing (administered) In Oligopoly

• Rigid oligopoly prices, often referred to as “administered” prices

• Administered prices have generally been defined as those prices arrived at within the firm as an integral part of its decision-making process, as distinguished from those generated entirely by the impersonal interplay of market forces. Nearly all prices communicated to the public through published price lists are administered.

• But the oligopolistic prices contributing to the postwar inflation have been relatively few,

confined principally to highly concentrated industries that deal with strong labor unions.

Cooperative vs. Non-cooperative Behaviour In OligopolyThe basic dilemma

• CO-OPERATIVE BEHAVIOUR: - in oligopoly is a situation when firms jointly decide the prices and output and maximizes their joint profit. This situation is called collusion, in this situation it becomes profitable for one  firm if it defects and cuts the prices and rises output,

• NON- COOPERATIVE  BEHAVIOUR: - is a situation when they do not co-operate and decides their prices and output separately and  compete  with each other. When firms in oligopoly do not co-operate it is called non- cooperative equilibrium  or  Nash equilibrium

In oligopoly the basic dilemma the firms face is whether to co-operate or to compete. If they co-operate  profit will be maximum

and if they do not profit for all will decrease

Dilemma

Oligopoly Pricing Through Game Strategic Behaviour

• Strategic behavior is the behavior that occurs when what is best for A depends upon what B does, and what is best for B depends upon what A does

• Strategic behavior has been analyzed using the mathematical techniques of game theory

• Game theory provides a description of oligopolistic behavior as a series of strategic moves and countermoves

GAME THEORY: - It is a mathematical theory that is used for the analysis and resolution of conflict situations in which

parties have opposing interests. The concepts of game theory provide a tool for formulating, analyzing and understanding different strategies. It attempts to address the functional relationship between the selected strategies of individual players and their market outcome, which may be either profit or loss.

For each company the possibility of playing either with a high or a low price is available, while the demand for the product of a company depends not only on its chosen strategy, but also on the strategy chosen by the opponent. A change in demand will lead to changes in profits. If a company increases the price, and the other retains a lower price, then the first company loses a part of the profits, because it loses part of its market, whereas another company increases its market share and profits.

Oligopoly Pricing Under Specific Assumption

Cournot’s Model Cournot competition is one where firms simultaneously choose their optimal quantity produced instead of

prices. The manner in which we derive a solution is through examining what the best strategy each has given their believes in what their competition would do.

The assumptions for Model:1. There are two firms (though the problem can be generalized to the

multiple firm Case)2. Firms produce a homogenous product.3. Firms choose optimal quantity produced simultaneously.4. Marginal Cost of production are the same for both firms.

Kinked Demand Curve and Price Leadership model

Examples

Airline IndustryCar Industry

ThankYou