OLIGOPOLY

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OLIGOPOLY

• A FEW SELLERS

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CHARACTERISTICS

• Market Power
• Interdependence

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MARKET POWER DETERMINANTS

• Number of producers
• Concentration ratio
• sales by top 4 firms
• Firm size
• sales

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MARKET POWER DETERMINANTS

• Barriers to entry
• Higher -- greater market power
• Availability of substitutes
• None/few greater market power
• Many less market power

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INTERDEPENDENCE

• Market Share
• of total sales by one firm
• Market share of firm increases?
• Clearly at expense of competitors
• So, if Firm A drops price to increase sales..
• Retaliation competitors drop price
• Result?
• Market shares unchanged but
• now all are charging lower price

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KINKED DEMAND CURVE

• Originparts of 2 demand curves
• Assumption Competitors will
• match price decreases
• ignore price increases
• Price is sticky at the kink

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MARGINAL REVENUE CURVE

• Origin .. Parts of 2 MR curves
• Use the part of MR curve
• that goes with part of D curve
• Result?
• MR curve with a gap
• Allows producer to absorb some cost increases
  without having to raise price

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GAME THEORY

• Method of guestimating
• competitors possible reactions to price changes
• and impact on your firm

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PROFIT MAXIMIZATION RULE

• Produce Q where MC MR
• If
• P gt AVC
• Expectations for oligopolist
• P gt ATC
• Profit made

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NON-PRICE COMPETITION

• Ways of competing OTHER than lowering price
• Oligopolist do this a lot
• (Its safer than price competition)
• Seek to make D more inelastic

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NON-PRICE COMPETITIONMETHODS

• Product differentiation
• Make yours different (better?) than others
• Advertising
• Warranties
• Service
• Store appearance/accessibility
• Note Non-price competition costs money

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OLIGOPOLIST v COMPETITOR

• P gt ATC
• Not productive efficiency
• P gt MC
• Not allocative efficiency
• Underallocation of resources

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COLLUSION ILLEGAL in US

• Price-fixing
• Firms agree on price they will all charge
• Allows them to act as monopoly
• Price Leadership
• One firm increases price
• Others follow suit
• Allocation of Market Shares
• Firms agree to divide up the market

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