L22

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L22

• Oligopoly

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Market structure

• Market structures
• Oligopoly industry with 2 or more large
  sellers.
• Intermediate level of fixed cost
• Have market power (but smaller than monopoly)
• Also oligopsony and bilateral oligopoly

N 1 2 3-10 10-
Name
pall
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Oligopolies in practice

• Examples of oligopolies in the USA
• - accounting audit services, tobacco, beer,
  aircraft, military equipment, motor vehicle, film
  and music recording industries
• Inefficiency and regulation
• Federal Trade Commission

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Oligopolies in practice

• Market share
• Industry is legally recognized as oligopolistic
• 1. concentration ratio big fourgt40
• (share of top 4 firms in the market)
• Concentrated industry if CRgt40
• 2. HERFINDAHL-HIRSCHMAN Index (HHI)
• Moderately concentrated industries HHIgt1000
• Concentrated industry HHIgt1800

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IO - Models

• Strategic environment harder than before
• Careful about timing and strategy
• Quantities
• - chosen simultaneously (Cournot)
• - leader and follower (Stackelberg)
• Prices (Bertrand)
• When goods are not homogenous - Monopolistic
  competition

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Cournot Model - Assumptions

• Homogenous good
• 2 firms (duopoly)
• Aggregate supply
• Market price
• chosen simultaneously
• Cost function
• Maximize profit

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Firm 1 Best response to

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Best response Geometry

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Cournot-Nash Equilibrium

• Cournot equilibrium
• Output of each firm is a best response to the
  output of the other firm
• No firm has incentives to deviate, given
  production of the other firm.

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Equilibrium (Example)

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Nash Equilibrium Geometry

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Incentives to collude

• Are there profit incentives for both firms to
  cooperate by lowering their output levels?
• If yes than collusion.
• Firms that collude form a cartel.
• Good for firms, bad for consumers and efficiency
  (DWL)
• Under what condition cartels are stable?

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Collusion

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Collusion Geometry

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Incentives to collude

• In long run reputation helps!
• - see movie Informant
• Cartels are hard to sustain if
• Only short run interactions
• Imperfect monitoring of price
• Alternative Mergers
• - Problem Federal Trade Commission

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Cournot with N firms