P1253296788GbdrN

1
Oligopoly a market with just a few firms
Soft Drinks Breakfast Cereals Tobacco Automobiles
Reasons economies of scale government
barriers advertising
2
Curve is less steep Greater price elasticity of
demand
Duopolist Demand
Market demand
Two firms with the same price split the market
Duopolist demand Competitor price 350
Quantity drops to zero if price is too high.
3
Change in Competitor Price
Shift in demand whenever competitor raises its
price
Duopolist demand Competitor price 450
Duopolist demand Competitor price 350
4
Monopoly or Cartel
Total quantity 125 Price 425 Total profit
15,625
Market demand
MR
AC MC
5
Duopolist Decision
Firm B quantity 100 price 350 profit
5,000 Firm A profit 5,000
Firm B Demand Firm A price 350
MR
AC MC
6
Duopolist Decision
Firm B quantity 138 price 369 profit
9,522 Firm A profit 2,813
Firm B Demand Firm A price 400
MR
Profit
AC MC
7
An Alternative Decision
Firm B quantity 75 price 400 profit
7,500 Firm A profit 7,500
Firm B Demand Firm A price 400
Profit
AC MC
8
A Payoff Matrix
Firm B
Price 350
Price 400
A 5,000
A 8,750
Price 350
Firm A
A 0
A 7,500
Price 400
9
Firm B
A Payoff Matrix
350
400
425
A 5,000
A 8,750
A 10,000
350
A 0
A 7,500
A 11,250
400
Firm A
A 0
A 3,125
A 7,812
425
10
Avoiding the Dilemma Price Matching

• Firm A sets a high price
• Firm A commits to match a lower price by Firm B
• Firm B has no incentive to underprice
• Firm B sets a high price

11
Repeated Pricing and Retaliation for Underpricing

• Firm A retaliates if Firm B underprices

Firm A sets price 400 (If Firm B does the
same, both firms will make 7500.)
Firm B sets price 350 (Firm B makes 8750,
Firm A makes 0.)
Firm A retaliates!
12
Firm A Retaliates Sets Price 325
Firm B quantity 81 price 341 profit
3,321 Firm A profit 3,400
Firm B Demand Firm A price 325
MR
AC MC
13
Kinked Demand Curve

• Firm A sets a price of 400 and will retaliate if
  Firm B undercuts

Firm B loses customers quickly by increasing
price
Firm B Demand
but gains little by lowering its price.
MR
AC MC
14
Algebra, if youre interested
Duopolist Demand QB 275 1.5 PA 2 PB if
PA350 QB 800 2 PB
PB 137.5 .75 PA .5 QB REVB QB x PB
137.5 QB .75 PA QB .5 QB2 MRB 137.5 .75
PA QB
Optimal Quantity QB 0.75 PA 162.5 if
PA350 QB 100