ECMC41 Week 4 Oligopoly

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "ECMC41 Week 4 Oligopoly"

Transcription

1 ECMC41 Week 4 Oligopoly Oligopoly An industry with a small number of firms (2-10?), where the firms make separate strategic decisions to maximize profit, but are aware of each other s actions in forming their strategies. Will compare to monopoly and perfect competition Many models of oligopoly: Cournot duopoly Cournot with n firms Stackelberg duopoly Bertrand Single-period games Multiple-period games

2 Cournot, Stackelberg and Bertrand developed a long time ago Modern oligopoly theory is game theory, and these older models can be expressed and analyzed as games. Cournot Cournot n Stackelberg Bertrand Joint monopoly Competitive (contestable?) Number of firms 2 Any # or more Many prob. Entry? No No No No No Yes Homogeneous product? Yes Yes Yes Yes Yes Yes Firm chooses? Output Output Output Price Output and price Output Simultaneous moves? Single period or multiple periods Yes Yes No Yes yes Single Single Single Single Single Single

3 Cournot duopoly Demand: Q = P Demand: P = Q q 1 + q 2 = Q Demand: P = q q 2 Firms do not communicate. Must make assumptions about their share of market in order to make strategic (i.e., profitmaximizing) decision about output. Each assumes the other s current output will remain constant, and each can therefore calculate its residual demand curve.

4 Graphically, Price q 2 Residual Demand Curve Industry Demand Curve q 2 Quantity If we start with P = q q 2

5 Then, the residual demand curve for Firm 1 (treating q2 as a constant) is : P = ( q 2 ) -.001q 1 So the expected MR 1 = ( q 2 ) -.002q 1 If TC = 0.28q, then MC = AC = 0.28 So MR = MC ( q 2 ) -.002q 1 = q 1 = q 2 q 1 = q 2 This is the profit-maximizing q In other words, the profit-maximizing value of q 1 is a function of whatever amount Firm 2 has decided to produce. We call this the reaction function, or bestresponse function for Firm 1

6 We assume that Firm 2 has the same beliefs, so Its residual demand curve is : P = ( q 1 ) -.001q 2 So the expected MR 2 = ( q 1 ) -.002q 2 If TC = 0.28q, then MC = AC = 0.28 So MR = MC ( q 1 ) -.002q 2 = q 2 = q 1 q 2 = q 1. We call this the reaction function, or bestresponse function for Firm 2

7 Solve for equilibrium by substituting one reaction function into the other (to find the values of q at which both are satisfied) Nash equilibrium q 1 = ( q 1 ) q 1 = q 1.75q 1 = 180 q 1 = 240 By a similar logic, q 2 = 240. This means that output in this Cournot industry is 480 units. Substituting into the demand function, we find that P = (480) = = $0.52. Each firm earns profit of.52 x 240 (.28 x 240) = $57.60 or profit of $ as a whole. Consumer Surplus will be (1-.52) x 480/2 = $115.20

8 Deadweight Loss (DWL) requires a comparison to results when P = MC (or Q =.28, so Q = 720 and P =.28). So DWL for Cournot is ( ) x ( )/2 = $28.80 It is easy and useful to do a comparison with Joint Monopoly and Perfect Competition. Joint monopoly would be achieved if two producers colluded to act like a single monopolist Monopoly: P = Q MR = Q MC = Q =.28 or.72 =.002Q, so Q = 360 (split between two producers) and P = (360) = $0.64

9 Profit would be.64 x 360 (.28 x 360) = $ (split in two) Consumer Surplus = (1 -.64) x 360/2 = $64.80 DWL = ( ) x ( )/2 = $64.80

10 Competitive result (from calculations above) is at Q = 720, and P =.28 Profit = (.28 x 720) (.28 x 720) = $0 Consumer Surplus = (1 -.28) x 720/2 = $ DWL = $0 Q P CS DWL Cournot Duopoly 480 $0.52 $ $ $28.80 Monopoly 360 $0.64 $ $64.80 $64.80 P. C. 720 $0.28 $0.00 $ $0.00

11 We could look at the output decision in a different framework game theory (a simultaneous single-period game). This is useful because it is not at all clear why every Cournot duopoly doesn t become a joint monopoly. Game theory will help us to understand. Game Theory Players Strategies Payoffs Rules of the game

12 Q 2 = 180 Q 2 = 240 Q 1 = 180 $64.80, $64.80 Q 1 = 240 $72.00, $54.00 $54.00, $72.00 $57.60, $57.60 What strategic move would Firm 1 make, if it can t negotiate with Firm 2? Why? What about Firm 2?

13 What is the equilibrium? Nash equilibrium concept: A pair of strategies is an equilibrium if neither player can make him/herself better off by changing strategy, given the strategy of the other player. i.e. neither player can make him/herself better off by changing the things he/she can control.

14 This is a type of game called the prisoners dilemma a very famous type of game. The players pursue their own self-interest. But, as a result, they can t reach the collectively-best payoff. It requires trust to achieve and maintain the joint-monopoly result (each produces 180). Either player can do better by cheating on the joint monopoly agreement. Helps us to understand why it is difficult to keep cartels together! (But things may be easier in a multi-period game). Also (to change the subject), why it is difficult to reduce pollution by exclusively voluntary measures!

15 Stackelberg leader-follower model Tweaking the Cournot model to see how a change in the behaviour of firms changes the equilibrium. Cournot: Each firm assumes the other will keep output constant. Choose best-response strategy. Stackelberg: One firm (the leader) assumes the other firm (the follower) will keep its best-response strategy constant, and uses that to manipulate the other firm. A more intelligent strategy. So, Firm 2 (the follower) follows the Cournot assumptions, and has a reaction function of q 2 = q 1 Firm 1 will incorporate this reaction into its strategic plan.

16 Demand is P = q q 1 But, incorporating Firm 2 s reaction function, this becomes P = ( q 1 ) -.001q 1 Simplifying, this is P = q 1 This is the residual demand curve for Firm 1, when it takes Firm 2 s output decisions into account. Now, Firm 1 can profit-maximize using this residual demand curve, so MR 1 = q 1 MC =.28 So,.001q 1 =.36 or q 1 = 360

17 Firm 2 will respond to this according to its reaction function (profit-maximization given its beliefs about the other player): q 2 = q 1 = (360) = 180. Total output in the industry will be 540 units. Equilibrium price will be P = = $0.46

18 1 = (.46 x 360) (.28 x 360) = $ = (.46 x 180) (.28 x 180) = $32.40 Total profit in the industry is $ Notice that the Stackelberg leader earns the same profit as each one of the joint monopolists! Consumer Surplus = (1 -.46) x 540/2 = $ DWL = ( ) x ( )/2 = $16.20 Q P CS DWL Monopoly 360 $0.64 $ $64.80 $64.80 Cournot Duopoly 480 $0.52 $ $ $28.80 Stackelberg 540 $0.46 $97.20 $ $16.20 P. C. 720 $0.28 $0.00 $ $0.00

19 Let s put the choice of output into a game framework again, but allow for one Firm to make a decision first, and the other second (leader-follower), instead of simultaneously. This is a sequential game (still a one-period game). Firms will have the choice of producing 180, 240 or 360 units of output, and there will be corresponding payoffs (profit). Firm 1 moves first and Firm 2 moves second. Firm 1 decides on its best strategy by looking forward, and reasoning back

20 The other model to look at is the Bertrand model with a homogeneous good. Bertrand producers choose price rather than quantity (choosing price is the strategic move). If we assume that they have the same kind of beliefs as Cournot producers (i.e., the other producer will keep its current price constant, while I choose a profit-maximizing price), we get an odd result.

Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly] ECON9 (Spring 0) & 350 (Tutorial ) Chapter Monopolistic Competition and Oligopoly (Part ) Price competition with homogenous products: The Bertrand duopoly model [Simultaneous move price setting duopoly]

More information

Economics 203: Intermediate Microeconomics I Lab Exercise #11. Buy Building Lease F1 = 500 F1 = 750 Firm 2 F2 = 500 F2 = 400

Economics 203: Intermediate Microeconomics I Lab Exercise #11. Buy Building Lease F1 = 500 F1 = 750 Firm 2 F2 = 500 F2 = 400 Page 1 March 19, 2012 Section 1: Test Your Understanding Economics 203: Intermediate Microeconomics I Lab Exercise #11 The following payoff matrix represents the long-run payoffs for two duopolists faced

More information

Oligopoly and Strategic Pricing

Oligopoly and Strategic Pricing R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small

More information

Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings

More information

Chapter 9 Basic Oligopoly Models

Chapter 9 Basic Oligopoly Models Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models McGraw-Hill/Irwin Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved. Overview I. Conditions for Oligopoly?

More information

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output. Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

More information

Week 7 - Game Theory and Industrial Organisation

Week 7 - Game Theory and Industrial Organisation Week 7 - Game Theory and Industrial Organisation The Cournot and Bertrand models are the two basic templates for models of oligopoly; industry structures with a small number of firms. There are a number

More information

Microeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy

Microeconomics. Lecture Outline. Claudia Vogel. Winter Term 2009/2010. Part III Market Structure and Competitive Strategy Microeconomics Claudia Vogel EUV Winter Term 2009/2010 Claudia Vogel (EUV) Microeconomics Winter Term 2009/2010 1 / 25 Lecture Outline Part III Market Structure and Competitive Strategy 12 Monopolistic

More information

Market Structure: Duopoly and Oligopoly

Market Structure: Duopoly and Oligopoly WSG10 7/7/03 4:24 PM Page 145 10 Market Structure: Duopoly and Oligopoly OVERVIEW An oligopoly is an industry comprising a few firms. A duopoly, which is a special case of oligopoly, is an industry consisting

More information

The Basics of Game Theory

The Basics of Game Theory Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology RECITATION NOTES #7 The Basics of Game Theory Friday - November 5, 2004 OUTLINE OF TODAY S RECITATION 1. Game theory definitions:

More information

12 Monopolistic Competition and Oligopoly

12 Monopolistic Competition and Oligopoly 12 Monopolistic Competition and Oligopoly Read Pindyck and Rubinfeld (2012), Chapter 12 09/04/2015 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition

More information

Chapter 12 Monopolistic Competition and Oligopoly

Chapter 12 Monopolistic Competition and Oligopoly Chapter Monopolistic Competition and Oligopoly Review Questions. What are the characteristics of a monopolistically competitive market? What happens to the equilibrium price and quantity in such a market

More information

Chapter 13 Oligopoly 1

Chapter 13 Oligopoly 1 Chapter 13 Oligopoly 1 4. Oligopoly A market structure with a small number of firms (usually big) Oligopolists know each other: Strategic interaction: actions of one firm will trigger re-actions of others

More information

13 MONOPOLISTIC COMPETITION AND OLIGOPOLY. Chapter. Key Concepts

13 MONOPOLISTIC COMPETITION AND OLIGOPOLY. Chapter. Key Concepts Chapter 13 MONOPOLISTIC COMPETITION AND OLIGOPOLY Key Concepts Monopolistic Competition The market structure of most industries lies between the extremes of perfect competition and monopoly. Monopolistic

More information

Mikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Mikroekonomia B by Mikolaj Czajkowski. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Mikroekonomia B by Mikolaj Czajkowski Test 12 - Oligopoly Name Group MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The market structure in which

More information

Chapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation

Chapter 11. T he economy that we. The World of Oligopoly: Preliminaries to Successful Entry. 11.1 Production in a Nonnatural Monopoly Situation Chapter T he economy that we are studying in this book is still extremely primitive. At the present time, it has only a few productive enterprises, all of which are monopolies. This economy is certainly

More information

Do not open this exam until told to do so.

Do not open this exam until told to do so. Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Winter 004 Final (Version ): Intermediate Microeconomics (ECON30) Solutions Final

More information

Oligopoly: Firms in Less Competitive Markets

Oligopoly: Firms in Less Competitive Markets Chapter 13 Oligopoly: Firms in Less Competitive Markets Prepared by: Fernando & Yvonn Quijano 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O Brien, 2e. Competing with

More information

Economics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic.

Economics II: Micro Fall 2009 Exercise session 5. Market with a sole supplier is Monopolistic. Economics II: Micro Fall 009 Exercise session 5 VŠE 1 Review Optimal production: Independent of the level of market concentration, optimal level of production is where MR = MC. Monopoly: Market with a

More information

ECON101 STUDY GUIDE 7 CHAPTER 14

ECON101 STUDY GUIDE 7 CHAPTER 14 ECON101 STUDY GUIDE 7 CHAPTER 14 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An oligopoly firm is similar to a monopolistically competitive

More information

Chapter 16 Oligopoly. 16.1 What Is Oligopoly? 1) Describe the characteristics of an oligopoly.

Chapter 16 Oligopoly. 16.1 What Is Oligopoly? 1) Describe the characteristics of an oligopoly. Chapter 16 Oligopoly 16.1 What Is Oligopoly? 1) Describe the characteristics of an oligopoly. Answer: There are a small number of firms that act interdependently. They are tempted to form a cartel and

More information

Oligopoly. Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly. Interdependence.

Oligopoly. Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly. Interdependence. Oligopoly Chapter 16-2 Models of Oligopoly Behavior No single general model of oligopoly behavior exists. Oligopoly An oligopoly is a market structure characterized by: Few firms Either standardized or

More information

a. Retail market for water and sewerage services Answer: Monopolistic competition, many firms each selling differentiated products.

a. Retail market for water and sewerage services Answer: Monopolistic competition, many firms each selling differentiated products. Chapter 16 1. In which market structure would you place each of the following products: monopoly, oligopoly, monopolistic competition, or perfect competition? Why? a. Retail market for water and sewerage

More information

chapter: Oligopoly Krugman/Wells Economics 2009 Worth Publishers 1 of 35

chapter: Oligopoly Krugman/Wells Economics 2009 Worth Publishers 1 of 35 chapter: 15 >> Oligopoly Krugman/Wells Economics 2009 Worth Publishers 1 of 35 WHAT YOU WILL LEARN IN THIS CHAPTER The meaning of oligopoly, and why it occurs Why oligopolists have an incentive to act

More information

Figure: Computing Monopoly Profit

Figure: Computing Monopoly Profit Name: Date: 1. Most electric, gas, and water companies are examples of: A) unregulated monopolies. B) natural monopolies. C) restricted-input monopolies. D) sunk-cost monopolies. Use the following to answer

More information

ECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition

ECON 312: Oligopolisitic Competition 1. Industrial Organization Oligopolistic Competition ECON 312: Oligopolisitic Competition 1 Industrial Organization Oligopolistic Competition Both the monopoly and the perfectly competitive market structure has in common is that neither has to concern itself

More information

Microeconomics II. ELTE Faculty of Social Sciences, Department of Economics. week 9 MARKET THEORY AND MARKETING, PART 3

Microeconomics II. ELTE Faculty of Social Sciences, Department of Economics. week 9 MARKET THEORY AND MARKETING, PART 3 MICROECONOMICS II. ELTE Faculty of Social Sciences, Department of Economics Microeconomics II. MARKET THEORY AND MARKETING, PART 3 Author: Supervised by February 2011 Prepared by:, using Jack Hirshleifer,

More information

4. Market Structures. Learning Objectives 4-63. Market Structures

4. Market Structures. Learning Objectives 4-63. Market Structures 1. Supply and Demand: Introduction 3 2. Supply and Demand: Consumer Demand 33 3. Supply and Demand: Company Analysis 43 4. Market Structures 63 5. Key Formulas 81 2014 Allen Resources, Inc. All rights

More information

Cooleconomics.com Monopolistic Competition and Oligopoly. Contents:

Cooleconomics.com Monopolistic Competition and Oligopoly. Contents: Cooleconomics.com Monopolistic Competition and Oligopoly Contents: Monopolistic Competition Attributes Short Run performance Long run performance Excess capacity Importance of Advertising Socialist Critique

More information

Oligopoly. Oligopoly is a market structure in which the number of sellers is small.

Oligopoly. Oligopoly is a market structure in which the number of sellers is small. Oligopoly Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. Under perfect

More information

Aggressive Advertisement. Normal Advertisement Aggressive Advertisement. Normal Advertisement

Aggressive Advertisement. Normal Advertisement Aggressive Advertisement. Normal Advertisement Professor Scholz Posted: 11/10/2009 Economics 101, Problem Set #9, brief answers Due: 11/17/2009 Oligopoly and Monopolistic Competition Please SHOW your work and, if you have room, do the assignment on

More information

Oligopoly. Chapter 25

Oligopoly. Chapter 25 Chapter 25 Oligopoly We have thus far covered two extreme market structures perfect competition where a large number of small firms produce identical products, and monopoly where a single firm is isolated

More information

Extreme cases. In between cases

Extreme cases. In between cases CHAPTER 16 OLIGOPOLY FOUR TYPES OF MARKET STRUCTURE Extreme cases PERFECTLY COMPETITION Many firms No barriers to entry Identical products MONOPOLY One firm Huge barriers to entry Unique product In between

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Variable Cost. Marginal Cost. Average Variable Cost 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R

Variable Cost. Marginal Cost. Average Variable Cost 0 $50 $50 $0 -- -- -- -- 1 $150 A B C D E F 2 G H I $120 J K L 3 M N O P Q $120 R Class: Date: ID: A Principles Fall 2013 Midterm 3 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Trevor s Tire Company produced and sold 500 tires. The

More information

Oligopoly and Game Theory

Oligopoly and Game Theory Chapter 15 MODERN PRINCIPLES OF ECONOMICS Third Edition Oligopoly and Game Theory Outline Cartels The Prisoner s Dilemma Oligopolies When Are Cartels and Oligopolies Most Successful? Government Policy

More information

OLIGOPOLY. Nature of Oligopoly. What Causes Oligopoly?

OLIGOPOLY. Nature of Oligopoly. What Causes Oligopoly? CH 11: OLIGOPOLY 1 OLIGOPOLY When a few big firms dominate the market, the situation is called oligopoly. Any action of one firm will affect the performance of other firms. If one of the firms reduces

More information

T28 OLIGOPOLY 3/1/15

T28 OLIGOPOLY 3/1/15 T28 OLIGOPOLY 3/1/15 1. Oligopoly is a market structure in which there are a small number of firms that engage in strategic interactions. If there are only two firms then we refer to the situation as a

More information

I. Noncooperative Oligopoly

I. Noncooperative Oligopoly I. Noncooperative Oligopoly Oligopoly: interaction among small number of firms Conflict of interest: Each firm maximizes its own profits, but... Firm j s actions affect firm i s profits Example: price

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Economics 103 Spring 2012: Multiple choice review questions for final exam. Exam will cover chapters on perfect competition, monopoly, monopolistic competition and oligopoly up to the Nash equilibrium

More information

Lecture 28 Economics 181 International Trade

Lecture 28 Economics 181 International Trade Lecture 28 Economics 181 International Trade I. Introduction to Strategic Trade Policy If much of world trade is in differentiated products (ie manufactures) characterized by increasing returns to scale,

More information

Eco 340 Industrial Economics Market Structures: Cartels / Cooperative Oligopoly. Prof Dr. Murat Yulek

Eco 340 Industrial Economics Market Structures: Cartels / Cooperative Oligopoly. Prof Dr. Murat Yulek Eco 340 Industrial Economics Market Structures: Cartels / Cooperative Oligopoly Prof Dr. Murat Yulek Oligopolistic Markets and the Cartel Competitive market: firms operate independently In other markets,

More information

MODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics. Wednesday, December 4, 2013 9:20:15 PM Central Standard Time

MODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics. Wednesday, December 4, 2013 9:20:15 PM Central Standard Time MODULE 64: INTRODUCTION TO OLIGOPOLY Schmidty School of Economics Learning Targets I Can Understand why oligopolists have an incentive to act in ways that reduce their combined profit. Explain why oligopolies

More information

MICROECONOMICS II. "B"

MICROECONOMICS II. B MICROECONOMICS II. "B" Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics, Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department

More information

5. Suppose demand is perfectly elastic, and the supply of the good in question

5. Suppose demand is perfectly elastic, and the supply of the good in question ECON 1620 Basic Economics Principles 2010 2011 2 nd Semester Mid term test (1) : 40 multiple choice questions Time allowed : 60 minutes 1. When demand is inelastic the price elasticity of demand is (A)

More information

When other firms see these potential profits they will enter the industry, causing a downward shift in the demand for a given firm s product.

When other firms see these potential profits they will enter the industry, causing a downward shift in the demand for a given firm s product. Characteristics of Monopolistic Competition large number of firms differentiated products (ie. substitutes) freedom of entry and exit Examples Upholstered furniture: firms; HHI* = 395 Jewelry and Silverware:

More information

Oligopoly and Strategic Behavior

Oligopoly and Strategic Behavior Oligopoly and Strategic Behavior MULTIPLE-CHOICE QUESTIONS Like a pure monopoly, an oligopoly is characterized by: a. free entry and exit in the long run. b. free entry and exit in the short run. c. significant

More information

Market structures. 18. Oligopoly Gene Chang Univ. of Toledo. Examples. Oligopoly Market. Behavior of Oligopoly. Behavior of Oligopoly

Market structures. 18. Oligopoly Gene Chang Univ. of Toledo. Examples. Oligopoly Market. Behavior of Oligopoly. Behavior of Oligopoly Market structures 18. Oligopoly Gene Chang Univ. of Toledo We distinguish the market structure by examining the following characteristics in the industry: Number of firms in the industry Nature of the

More information

Lesson 13 Duopoly. c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved Version C

Lesson 13 Duopoly. c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved Version C Lesson 13. Duopoly 1 Lesson 13 Duopoly c 2010, 2011 Roberto Serrano and Allan M. Feldman All rights reserved Version C 1. Introduction In this lesson, we study market structures that lie between perfect

More information

Models of Imperfect Competition

Models of Imperfect Competition Models of Imperfect Competition Monopolistic Competition Oligopoly Models of Imperfect Competition So far, we have discussed two forms of market competition that are difficult to observe in practice Perfect

More information

Common in European countries government runs telephone, water, electric companies.

Common in European countries government runs telephone, water, electric companies. Public ownership Common in European countries government runs telephone, water, electric companies. US: Postal service. Because delivery of mail seems to be natural monopoly. Private ownership incentive

More information

Chapter 14. Oligopoly

Chapter 14. Oligopoly Chapter 14. Oligopoly Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 202 504 Principles of Microeconomics Oligopoly Market Oligopoly: A market structure in which a small number

More information

Final Exam (Version 1) Answers

Final Exam (Version 1) Answers Final Exam Economics 101 Fall 2003 Wallace Final Exam (Version 1) Answers 1. The marginal revenue product equals A) total revenue divided by total product (output). B) marginal revenue divided by marginal

More information

Oligopoly: Cournot/Bertrand/Stackelberg

Oligopoly: Cournot/Bertrand/Stackelberg Outline Alternative Market Models Wirtschaftswissenschaften Humboldt Universität zu Berlin March 5, 2006 Outline 1 Introduction Introduction Alternative Market Models 2 Game, Reaction Functions, Solution

More information

Economics Instructor Miller Oligopoly Practice Problems

Economics Instructor Miller Oligopoly Practice Problems Economics Instructor Miller Oligopoly Practice Problems 1. An oligopolistic industry is characterized by all of the following except A) existence of entry barriers. B) the possibility of reaping long run

More information

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2

Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Monopoly: static and dynamic efficiency M.Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004; ch. 2 Economics of Competition and Regulation 2015 Maria Rosa Battaggion Perfect

More information

9.1 Cournot and Bertrand Models with Homogeneous Products

9.1 Cournot and Bertrand Models with Homogeneous Products 1 Chapter 9 Quantity vs. Price Competition in Static Oligopoly Models We have seen how price and output are determined in perfectly competitive and monopoly markets. Most markets are oligopolistic, however,

More information

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3

Economics 201 Fall 2010 Introduction to Economic Analysis Problem Set #6 Due: Wednesday, November 3 Economics 201 Fall 2010 Introduction to Economic Analysis Jeffrey Parker Problem Set #6 Due: Wednesday, November 3 1. Cournot Duopoly. Bartels and Jaymes are two individuals who one day discover a stream

More information

Imperfect Competition. Oligopoly. Types of Imperfectly Competitive Markets. Imperfect Competition. Markets With Only a Few Sellers

Imperfect Competition. Oligopoly. Types of Imperfectly Competitive Markets. Imperfect Competition. Markets With Only a Few Sellers Imperfect Competition Oligopoly Chapter 16 Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. Copyright 2001 by Harcourt, Inc. All rights reserved.

More information

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.)

CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) CHAPTER 18 MARKETS WITH MARKET POWER Principles of Economics in Context (Goodwin et al.) Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates the

More information

Chapter 13 Market Structure and Competition

Chapter 13 Market Structure and Competition Chapter 13 Market Structure and Competition Solutions to Review Questions 1. Explain why, at a Cournot equilibrium with two firms, neither firm would have any regret about its output choice after it observes

More information

Oligopoly. Unit 4: Imperfect Competition. Unit 4: Imperfect Competition 4-4. Oligopolies FOUR MARKET MODELS

Oligopoly. Unit 4: Imperfect Competition. Unit 4: Imperfect Competition 4-4. Oligopolies FOUR MARKET MODELS 1 Unit 4: Imperfect Competition FOUR MARKET MODELS Perfect Competition Monopolistic Competition Pure Characteristics of Oligopolies: A Few Large Producers (Less than 10) Identical or Differentiated Products

More information

LECTURE #15: MICROECONOMICS CHAPTER 17

LECTURE #15: MICROECONOMICS CHAPTER 17 LECTURE #15: MICROECONOMICS CHAPTER 17 I. IMPORTANT DEFINITIONS A. Oligopoly: a market structure with a few sellers offering similar or identical products. B. Game Theory: the study of how people behave

More information

Other explanations of the merger paradox. Industrial Economics (EC5020), Spring 2010, Sotiris Georganas, February 22, 2010

Other explanations of the merger paradox. Industrial Economics (EC5020), Spring 2010, Sotiris Georganas, February 22, 2010 Lecture 6 Agenda Introduction Mergers in Cournot Oligopoly Extension 1: number of firms Extension 2: fixed cost Extension 3: asymmetric costs Extension 4: Stackelberg mergers Extension 5: Bertrand competition

More information

chapter: Solution Oligopoly 1. The accompanying table presents market share data for the U.S. breakfast cereal market

chapter: Solution Oligopoly 1. The accompanying table presents market share data for the U.S. breakfast cereal market S209-S220_Krugman2e_PS_Ch15.qxp 9/16/08 9:23 PM Page S-209 Oligopoly chapter: 15 1. The accompanying table presents market share data for the U.S. breakfast cereal market in 2006. Company a. Use the data

More information

Market Structure: Oligopoly (Imperfect Competition)

Market Structure: Oligopoly (Imperfect Competition) Market Structure: Oligopoly (Imperfect Competition) I. Characteristics of Imperfectly Competitive Industries A. Monopolistic Competition large number of potential buyers and sellers differentiated product

More information

Chapter 13: Strategic Decision Making in Oligopoly Markets

Chapter 13: Strategic Decision Making in Oligopoly Markets Learning Objectives After reading Chapter 13 and working the problems for Chapter 13 in the textbook and in this Workbook, you should be able to do the following things For simultaneous decisions: Explain

More information

Marginal cost. Average cost. Marginal revenue 10 20 40

Marginal cost. Average cost. Marginal revenue 10 20 40 Economics 101 Fall 2011 Homework #6 Due: 12/13/2010 in lecture Directions: The homework will be collected in a box before the lecture. Please place your name, TA name and section number on top of the homework

More information

6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games

6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games 6.254 : Game Theory with Engineering Applications Lecture 2: Strategic Form Games Asu Ozdaglar MIT February 4, 2009 1 Introduction Outline Decisions, utility maximization Strategic form games Best responses

More information

5 Market Games For Teaching Economics

5 Market Games For Teaching Economics 5 Market Games For Teaching Economics Progression 5 Market Games from website economics-games.com To be played separately or as a sequence: Market Game 1: Sunk costs, monopoly, and introduction to the

More information

Market Structure: Perfect Competition and Monopoly

Market Structure: Perfect Competition and Monopoly WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

More information

Northern University Bangladesh

Northern University Bangladesh Northern University Bangladesh Managerial Economics ( MBA 5208) Session # 09 Oligopoly & Monopolistic Competition Prof. Mahmudul Alam (PMA) 23 September, 2011 (Friday) 1 1. Monopolistic Competition & Oligopoly

More information

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs:

EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: EXAM TWO REVIEW: A. Explicit Cost vs. Implicit Cost and Accounting Costs vs. Economic Costs: Economic Cost: the monetary value of all inputs used in a particular activity or enterprise over a given period.

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 15 - Oligopoly Fall 2010 Herriges (ISU) Ch. 15 Oligopoly Fall 2010 1 / 25 Outline 1 Understanding Oligopolies 2 Game Theory Overcoming the Prisoner s Dilemma

More information

1 Cournot Oligopoly with n firms

1 Cournot Oligopoly with n firms BEE07, Microeconomics, Dieter Balkenborg Cournot Oligopoly with n firms firmi soutput: q i totaloutput: q=q +q + +q n opponent soutput: q i =q q i =Σ j i q i constantmarginalcostsoffirmi: c i inverse demand

More information

Oligopoly. Oligopoly. Offer similar or identical products Interdependent. How people behave in strategic situations

Oligopoly. Oligopoly. Offer similar or identical products Interdependent. How people behave in strategic situations Oligopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 Oligopoly Only a few sellers Oligopoly Offer similar or identical products Interdependent Game theory How people

More information

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit

Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit Chapter 8 Production Technology and Costs 8.1 Economic Costs and Economic Profit 1) Accountants include costs as part of a firm's costs, while economists include costs. A) explicit; no explicit B) implicit;

More information

Exercises for Industrial Organization Master de Economía Industrial 2012-2013. Matilde Pinto Machado

Exercises for Industrial Organization Master de Economía Industrial 2012-2013. Matilde Pinto Machado Exercises for Industrial Organization Master de Economía Industrial 2012-2013 Matilde Pinto Machado September 11, 2012 1 Concentration Measures 1. Imagine two industries A and B with concentration curves

More information

Industry profit in an oligopoly (sum of all firms profits) < monopoly profit.

Industry profit in an oligopoly (sum of all firms profits) < monopoly profit. Collusion. Industry profit in an oligopoly (sum of all firms profits) < monopoly profit. Price lower and industry output higher than in a monopoly. Firms lose because of non-cooperative behavior : Each

More information

Oligopoly: Competition among the Few

Oligopoly: Competition among the Few King Fahd University of Petroleum and Minerals College of Industrial Management Department of Finance and Economics ECON 511: Managerial Economics Oligopoly: Competition among the Few 216913 Mohammed Husein

More information

Chapter 16 Monopolistic Competition and Oligopoly

Chapter 16 Monopolistic Competition and Oligopoly Chapter 16 Monopolistic Competition and Oligopoly Market Structure Market structure refers to the physical characteristics of the market within which firms interact It is determined by the number of firms

More information

Monopoly WHY MONOPOLIES ARISE

Monopoly WHY MONOPOLIES ARISE In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?

More information

Profit maximization in different market structures

Profit maximization in different market structures Profit maximization in different market structures In the cappuccino problem as well in your team project, demand is clearly downward sloping if the store wants to sell more drink, it has to lower the

More information

All these models were characterized by constant returns to scale technologies and perfectly competitive markets.

All these models were characterized by constant returns to scale technologies and perfectly competitive markets. Economies of scale and international trade In the models discussed so far, differences in prices across countries (the source of gains from trade) were attributed to differences in resources/technology.

More information

R&D cooperation with unit-elastic demand

R&D cooperation with unit-elastic demand R&D cooperation with unit-elastic demand Georg Götz This draft: September 005. Abstract: This paper shows that R&D cooperation leads to the monopoly outcome in terms of price and quantity if demand is

More information

Monopolistic Competition

Monopolistic Competition In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what

More information

Jason Welker 2009 Zurich International School

Jason Welker 2009 Zurich International School 1 AP Microeconomics: Exam Study Guide Format: 60 MC questions worth 66.67% of total. 70 minutes to answer 20 questions are definitional Example: The unemployment rate measures the percentage of (A) people

More information

Study Guide Exam 3 Fall 2011

Study Guide Exam 3 Fall 2011 Study Guide Exam 3 Fall 2011 Student: Suppose that there are just two firms in a small market. Acme Manufacturing's Total Costs equal $100 + $3 Qty. Generic Industries' Total Costs equal $500 + $3 Qty.

More information

Course: Economics I. Author: Ing. Martin Pop

Course: Economics I. Author: Ing. Martin Pop Course: Economics I Author: Ing. Martin Pop Contents Introduction 1. Characteristics of imperfect competition. The main causes of imperfect competition 2. Equilibrium firms in imperfect competition 3.

More information

Games Manipulators Play

Games Manipulators Play Games Manipulators Play Umberto Grandi Department of Mathematics University of Padova 23 January 2014 [Joint work with Edith Elkind, Francesca Rossi and Arkadii Slinko] Gibbard-Satterthwaite Theorem All

More information

ECON 600 Lecture 5: Market Structure - Monopoly. Monopoly: a firm that is the only seller of a good or service with no close substitutes.

ECON 600 Lecture 5: Market Structure - Monopoly. Monopoly: a firm that is the only seller of a good or service with no close substitutes. I. The Definition of Monopoly ECON 600 Lecture 5: Market Structure - Monopoly Monopoly: a firm that is the only seller of a good or service with no close substitutes. This definition is abstract, just

More information

Economics I. Decision-making Firm in Imperfect Competition

Economics I. Decision-making Firm in Imperfect Competition Economics I Decision-making Firm in Imperfect Competition The aim of the first lecture is to explain and analyze the markets in imperfect competition and firm behavior in imperfectly competitive environment.

More information

Spencer, Barbara and James A Brander, strategic trade policy strategic trade policy

Spencer, Barbara and James A Brander, strategic trade policy strategic trade policy Spencer, Barbara and James A Brander, strategic trade policy, SN Durlauf and L. E. Blume, The New Palgrave Dictionary of Economics, forthcoming, Palgrave Macmillan, reproduced with permission of Palgrave

More information

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS

Chapter 15: Monopoly WHY MONOPOLIES ARISE HOW MONOPOLIES MAKE PRODUCTION AND PRICING DECISIONS Chapter 15: While a competitive firm is a taker, a monopoly firm is a maker. A firm is considered a monopoly if... it is the sole seller of its product. its product does not have close substitutes. The

More information

Cournot s model of oligopoly

Cournot s model of oligopoly Cournot s model of oligopoly Single good produced by n firms Cost to firm i of producing q i units: C i (q i ), where C i is nonnegative and increasing If firms total output is Q then market price is P(Q),

More information

Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics

Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics Competition between Apple and Samsung in the smartphone market introduction into some key concepts in managerial economics Dr. Markus Thomas Münter Collège des Ingénieurs Stuttgart, June, 03 SNORKELING

More information

The Analysis of the Article Microsoft's Aggressive New Pricing Strategy Using. Microeconomic Theory

The Analysis of the Article Microsoft's Aggressive New Pricing Strategy Using. Microeconomic Theory 2 The Analysis of the Article Microsoft's Aggressive New Pricing Strategy Using Microeconomic Theory I. Introduction: monopolistic power as a means of getting high profits II. The review of the article

More information

MobLab Game Catalog For Business Schools Fall, 2015

MobLab Game Catalog For Business Schools Fall, 2015 MobLab Game Catalog For Business Schools Fall, 2015 CORE COURSE COVERAGE Economics For Business Principles of Business Microeconomic Analysis Decisions Game Theory Negotiation Strategy Managerial Economics

More information

The New Trade Theory. Monopoly and oligopoly in trade. Luca De Benedictis 1. Topic 3. 1 University of Macerata

The New Trade Theory. Monopoly and oligopoly in trade. Luca De Benedictis 1. Topic 3. 1 University of Macerata The New Trade Theory Monopoly and oligopoly in trade Luca De Benedictis 1 1 University of Macerata Topic 3 A new generation of models Main characteristics and insights: Countries do not trade, rms do.

More information