Oligopoly
Dec 30, 2015
OligopolyOligopoly
OligopolyOligopoly
Two examples of oligopoly
Two examples of oligopoly
Market shares of thelargest brewers
Market shares of thelargest brewers
Market shares of thelargest brewers
Market shares of thelargest brewers
0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
$ per barrel Actual price
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran OPEC’s first
quotas
Cease-fire inIran-Iraq war Recession
in Far East
Iraq invadesKuwait
New OPECquotas
World-widerecovery
World-wideslowdown
Impendingwar
with Iraq
Oil pricesOil prices
0
5
10
15
20
25
30
35
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
$ per barrel Actual priceCost in 1973 prices
Yom KippurWar: Arab oil
embargo
First oil fromNorth Sea
Revolutionin Iran
Iraq invadesIran OPEC’s first
quotas
Cease-fire inIran-Iraq war Recession
in Far East
Iraq invadesKuwait
New OPECquotas
World-widerecovery
World-wideslowdown
Impendingwar
with Iraq
Oil pricesOil prices
OligopolyOligopoly
A profit-maximising cartel
A profit-maximising cartel
£
Q O
Industry D AR
Profit-maximising cartelProfit-maximising cartel
£
Q O
Industry D AR
Industry MC
Industry MR
Q1
P1
Profit-maximising cartelProfit-maximising cartel
OligopolyOligopoly
Price leadership
(assumption of fixed market share)
Price leadership
(assumption of fixed market share)
£
Q O
MR leader
AR D leader
AR D market
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
Assume constantmarket share
for leader
£
Q O
AR D market
MC
MR leader
PL
QT
AR D leader
QL
l t
Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share
OligopolyOligopoly
Game theoryGame theory
Profits for firms A and B at different pricesProfits for firms A and B at different prices
£2.00 £1.80
£2.00
£1.80
X’s price
Y’s price
A B
C D
£10m each
£8m each£12m for Y£5m for X
£5m for Y£12m for X
The prisoners' dilemmaThe prisoners' dilemma
Not confess Confess
Notconfess
Confess
Amanda's alternatives
Nigel'salternatives
A B
C D
Each gets1 year
Each gets3 years
Nigel gets3 months
Amanda gets10 years
Nigel gets10 years
Amanda gets3 months
OligopolyOligopoly
A decision treeA decision tree
Boeingdecides
500
seat
er
500 seater
500 seater
400 seater
400 seater
400 seater
A decision treeA decision tree
Boeing –£10mAirbus –£10m
(1)
Boeing +£30mAirbus +£50m
(2)
Boeing +£50mAirbus +£30m
(3)
Boeing –£10mAirbus –£10m (4)
Airbusdecides
B2
Airbusdecides
B1
A
OligopolyOligopoly
Kinked demand curve theory
Kinked demand curve theory
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
Current priceand quantity
give one pointon demand curve
£
QO
P1
Q1
D
D
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
MC2
MC1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve