LECTURE 6: OLIGOPOLY. Jan Zouhar. Games and Decisions

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "LECTURE 6: OLIGOPOLY. Jan Zouhar. Games and Decisions"

Transcription

1 LECTURE 6: OLIGOPOLY

2 Market Structures the list of basic market structure types (seller-side types only): Number of sellers Seller entry barriers Deadweight loss Perfect competition Many No None Monopolistic competition Many No None Oligopoly Few Yes Medium Monopoly One Yes High

3 Collusive vs. Non-Collusive Oligopolies 3 note: oligopoly differs from monopoly (allocation-wise) only if there s no collusion collusion: a largely illegal form of cooperation amongst the sellers that includes price fixing, market division, total industry output control, profit division, etc. controlled by competition/anti-trust laws well-known collusion cases: OPEC, telecommunication, drugs, sports, chip dumping (poker) game-theoretical models: cooperative setting (collusive oligopoly) coalition theory games in the characteristic-function form non-cooperative setting (competitive, non-collusive oligopoly) normal form game analysis NE s etc.; however, matrices can t typically be used for payoffs

4 Oligopoly Model Specification 4 to make the analysis simple, we ll make several assumptions: 1. single-product model: oligopolists produce a single type of homogenous product. one strategic variable: firms decide about prices or output levels 3. static model: single-period analysis only in dynamic models, there are more diverse strategic options: elimination of competitors even with contemporary losses etc. 4. single objective: all firms maximize their individual profit Three basic non-cooperative oligopoly models: Bertrand oligopoly firms simultaneously choose prices Cournot oligopoly firms simultaneously choose quantities Stackelberg oligopoly firms choose quantities sequentially note: sequential-move games are typically not modelled as normal-form games. Instead, we use the extensive-form approach (not this lecture).

5 5 Bertrand Duopoly Bertrand duopoly ( oligopolists only) model notation: market demand function: q = D(p) prices charged by the players: p 1, p resulting quantities: q 1, q unit costs: c 1, c (for simplicity: AC = MC = c) homogenous product lower price attracts all the consumers p 1 < p q 1 = D(p 1 ), q = 0 p 1 > p q 1 = 0, q = D(p ) p 1 = p equal market share, q 1 = q = ½ D(p 1 ) = ½ D(p ) as long as the prices are higher than c 1 and c, both oligopolists tend to push prices down (below the other player s price) imagine the prices are equal and above c 1 ; by lowering the price just slightly, player 1 can gain the whole market (if p stays the same) best response of player 1 to p is to choose p 1 = p ε ( just below p ) (until the prices reach c 1 player 1 suffers a loss below)

6 6 Bertrand Duopoly (cont d) NE depends on the MC of the players: c 1 = c p 1 * = p * = c 1 = c zero economic profit for both c 1 < c p 1 * = c ε player 1 wins all, positive profit c 1 > c p * = c 1 ε player wins all, positive profit more precisely: graphical best-response analysis reaction curves: p 1 (p ) 45 monopoly price (no player 1) p p M NE p (p 1 ) p just below p 1 (curve just below 45 ) c c 1 p 1 M p 1

7 Bertrand Duopoly (cont d) 7 price competition leads to fairly efficient allocation Critique of the Bertrand model (or, when Bertrand model fails to work) capacity constraints of production e.g., consider the c 1 < c situation: if player 1 can t supply enough for the whole market, player can still charge p above c and attract some customers (and achieve a positive profit) if c 1 = c and neither player can supply to all customers, either player can raise the output price above c lack of product homogeneity (homogeneity disputable in most cases) transaction/transportation costs: may differ for the specific customer firm interactions e.g., shops at both ends of a street: people tend to pick the closer one if transportation costs are accounted for, the consumer expenditures vary even if prices are equal

8 Cournot Oligopoly Formal Treatment 8 model type normal-form game with the following elements: list of firms: 1,,,N strategy spaces: X 1, X,,X N potential quantities: typically intervals like [0,1000] infinite alternatives! the output level produced by i th player (the strategy adopted) is denoted x i a strategy profile is an N-tuple: (x 1,x,,x N ) (where x i X i ) cost functions: c 1 (x 1 ), c (x ),, c N (x N ) total cost as the function of output level price function (or inverse demand function): p = f(x 1 + x + + x N ) i.e., market price is the function of total industry output profit of i th firm: i( x1,..., xn ) TRi TCi xi f ( x1... xn ) ci ( xi )

9 Nash Equilibrium in Cournot Oligopoly 9 mathematical definition: A strategy profile (x 1 *, x *,, x N *) is a NE if for all i = 1,,N ( x *, x *,..., x,..., x *) ( x *, x *,..., x *,..., x *) holds for all x i X i. i 1 i N i 1 i N finding the NE: best-response approach (again) NE: the strategies have to be the best responses to one another best-response functions: for player 1: r 1 (x,,x N ) is the best-response x 1 chosen by player 1, given that the other player s quantities are x,,x N mathematically: r ( x,... x ) argmax ( x, x,..., x ) 1 N i 1 N x X 1 1 NE: x * r ( x *,..., x *, x *,..., x *) i i 1 i1 i1 N for i = 1,,N

10 10 Example 1: Cournot Duopoly price function: other characteristics: p f( x x ) 100 ( x x ) 1 1 X 0, c ( x ) 150 1x , ( ) X c x x profit functions: ( x, x ) x f( x x ) c ( x ) x1 100 ( x1 x) 150 1x x1 x1 x1x 150 ( x1, x) 100x x x1x 100x x x x 150 1x1 best response of player 1 to x : profit-maximizing (π 1 -maximizing) value of x 1 for the given x

11 11 Example 1: Cournot Duopoly profit of player 1 for three different levels of x : 1500 (cont d) best response to x = 10 is x 1 40, best response to x = 5 is x 1 33, best response to x = 50 is x 1 0, x = 10 x = 5 x = x 1 best response for an arbitrary level of x : as the function π 1 (x 1,x ) is strictly concave in x 1 for any x, we can use the first-order condition for a local extreme! 1( x1, x) 88 x1 x 0 x 1

12 Note: first order conditions are generally not sufficient for a maximum, only necessary conditions for extreme (but: concave function global maximum) f( x) x f(x) x

13 13 Example 1: Cournot Duopoly (cont d) we can also write the result in terms of the reaction function r 1 :! 1( x 1, x ) 88 x x 0 x r ( x ) 44 x x similarly, for player, we obtain: ( x 1, x ) 100 x 4 x 0 x r ( x ) 5 x x! altogether, we have linear equations; for NE strategies, both have to hold at the same time in order to find the NE, we just need to solve 1 88 x1* x* 0 x1* r1( x*) x1* 36 or 100 x * 4 x * 0 x * r ( x *) x * Question: What are the equilibrium profits and price?

14 Collusive Oligopoly 14 model framework: as in case of Cournot oligopoly, only that players can form coalitions coalition: a group of firms that coordinate output levels and redistribute profits grand coalition: the coalition of all oligopolists, Q = {1,,,N } other coalitions are denoted by K,L, a single-firm coalition is still called a coalition, e.g. K = {}, and so is the empty coalition { } Question: How many different coalitions can be formed with N firms? characteristic function (of the oligopoly): a function v(k) that assigns to any coalition K the maximum attainable total profit of K payoff function: single player, individual payoff, for a given strategy profile characteristic function: coalition, sum of members profits, max. attainable

15 15 Collusive Oligopoly (cont d) characteristic function for grand coalition: v ( Q ) max ( x,..., x ) N ( x1,..., xn ) i1 i 1 N characteristic function for other coalitions: profit of coalition members depends on the quantity chosen by non-members what will the other players do? (Generally, difficult to say.) 1. minimax characteristic function: assume non-members supply as much as they can (up to their capacity constraints). equilibrium characteristic function: assume the other players choose the NE quantities characteristic function for an arbitrary coalition: v( K ) max i K i ( x 1,..., x N ) ( x ) i ik

16 16 Example : Collusive Duopoly consider the same duopoly as in example 1, only with capacity constraints: price function: other characteristics: profit functions: first, we ll find the equilibrium characteristic function: we already know the NE values: p f( x x ) 100 ( x x ) 1 1 X 0,40 c ( x ) 150 1x ,0 ( ) X c x x 1 x1 x x1 x1 x1x ( x1, x) 100x x x1x (, ) x x * 36 * * 16 * 51 immediately, we have: v(1) max ( x,16) (36,16) 1146 x X v() max (36, x ) (36,16) 51 x X

17 17 Example : Collusive Duopoly (cont d) for grand coalition Q = {1,}, we obtain: v(1,) max ( x, x ) ( x, x ) ( x, x ) 1 ( x, x ) max 88x 100x x x x x 150 function of two variables now, but still concave (see next slide) first-order conditions (both partial derivatives equal zero)! 1,( x1, x) 88 x1 x 0 opt x1 x1 38 opt! opt 1, 1,( x1, x) x x1 4x 0 x 18 v(q) = v(1,) = 18

18 Example : Collusive Duopoly (cont d) 0 x πy 1, - -4 x x x x 1

19 first-order conditions: necessary conditions for local extremes (not sufficient, not for maxima only!) 0.5 y x x

20 0 Example : Collusive Duopoly (cont d) the complete equilibrium characteristic function is as follows: minimax characteristic function: v( ) 0 v(1) 1146 v() 51 v(1,) 18 v( ) and v(1,) are the same as in the equilibrium char. function for v(1) and v(), we calculate the players profits under the condition that the other player produces up to his/her capacity constraint: x X x X v(1) max ( x,0) max 68x1 x 150 (34,0) x X x X v() max (40, x ) max 60x x (40,15) 450

21 1 Example : Collusive Duopoly (cont d) a comparison of the two characteristic functions: equilibrium minimax v( ) 0 0 v(1) v() v(1,) v(1,) v(1) v() core of the oligopoly: a division of payoffs a 1,a such that a a 18, a a 18, 1 1 a a 1146, or a 1006, , a 450.

22 LECTURE 6: OLIGOPOLY

Oligopoly: Introduction. Oligopoly. Oligopoly Models. Oligopoly: Analysis. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert

Oligopoly: Introduction. Oligopoly. Oligopoly Models. Oligopoly: Analysis. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert Oligopoly: Introduction Oligopoly ECON 370: Microeconomic Theory Summer 00 Rice University Stanley Gilbert Alternative Models of Imperfect Competition Monopoly and monopolistic competition Duopoly - two

More information

New Technology and Profits

New Technology and Profits Another useful comparative statics exercise is to determine how much a firm would pay to reduce its marginal costs to that of its competitor. This will simply be the difference between its profits with

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

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

Bertrand with complements

Bertrand with complements Microeconomics, 2 nd Edition David Besanko and Ron Braeutigam Chapter 13: Market Structure and Competition Prepared by Katharine Rockett Dieter Balkenborg Todd Kaplan Miguel Fonseca Bertrand with complements

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

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

C H A P T E R 12. Monopolistic Competition and Oligopoly CHAPTER OUTLINE

C H A P T E R 12. Monopolistic Competition and Oligopoly CHAPTER OUTLINE C H A P T E R 12 Monopolistic Competition and Oligopoly CHAPTER OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus Collusion: The Prisoners Dilemma 12.5

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

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

1. Suppose demand for a monopolist s product is given by P = 300 6Q

1. Suppose demand for a monopolist s product is given by P = 300 6Q Solution for June, Micro Part A Each of the following questions is worth 5 marks. 1. Suppose demand for a monopolist s product is given by P = 300 6Q while the monopolist s marginal cost is given by MC

More information

Competition and Regulation. Lecture 2: Background on imperfect competition

Competition and Regulation. Lecture 2: Background on imperfect competition Competition and Regulation Lecture 2: Background on imperfect competition Monopoly A monopolist maximizes its profits, choosing simultaneously quantity and prices, taking the Demand as a contraint; The

More information

Chapter 14. Oligopoly and Monopolistic Competition. Anyone can win unless there happens to be a second entry. George Ade

Chapter 14. Oligopoly and Monopolistic Competition. Anyone can win unless there happens to be a second entry. George Ade Chapter 14 Oligopoly and Monopolistic Competition Anyone can win unless there happens to be a second entry. George Ade Chapter 14 Outline 14.1 Market Structures 14.2 Cartels 14.3 Noncooperative Oligopoly

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

Solution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY

Solution to Selected Questions: CHAPTER 12 MONOPOLISTIC COMPETITION AND OLIGOPOLY Chulalongkorn University: BBA International Program, Faculty of Commerce and Accountancy 900 (Section ) Chairat Aemkulwat Economics I: Microeconomics Spring 05 Solution to Selected Questions: CHAPTER MONOPOLISTIC

More information

Microeconomic Analysis

Microeconomic Analysis Microeconomic Analysis Oligopoly and Monopolistic Competition Ch. 13 Perloff Topics Market Structures. Cartels. Noncooperative Oligopoly. Cournot Model. Stackelberg Model. Comparison of Collusive, Cournot,

More information

University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly

University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly 1 Introduction University of Hong Kong ECON6021 Microeconomic Analysis Oligopoly There are many real life examples that the participants have non-negligible influence on the market. In such markets, every

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

3.2. Cournot Model. Matilde Machado

3.2. Cournot Model. Matilde Machado Matilde Machado 1 Assumptions: All firms produce an homogenous product The market price is therefore the result of the total supply (same price for all firms) Firms decide simultaneously how much to produce

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

LECTURE 10: GAMES IN EXTENSIVE FORM

LECTURE 10: GAMES IN EXTENSIVE FORM LECTURE 10: GAMES IN EXTENSIVE FORM Sequential Move Games 2 so far, we have only dealt with simultaneous games (players make the decisions at the same time, or simply without knowing what the action of

More information

Week 3: Monopoly and Duopoly

Week 3: Monopoly and Duopoly EC202, University of Warwick, Term 2 1 of 34 Week 3: Monopoly and Duopoly Dr Daniel Sgroi Reading: 1. Osborne Sections 3.1 and 3.2; 2. Snyder & Nicholson, chapters 14 and 15; 3. Sydsæter & Hammond, Essential

More information

Unit 8. Firm behaviour and market structure: monopolistic competition and oligopoly

Unit 8. Firm behaviour and market structure: monopolistic competition and oligopoly Unit 8. Firm behaviour and market structure: monopolistic competition and oligopoly Learning objectives: to understand the interdependency of firms and their tendency to collude or to form a cartel; to

More information

INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK

INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK UNIT EC407, LEVEL 2 INDUSTRIAL ECONOMICS COMPONENT: THE INTERACTIVE TEXTBOOK Semester 1 1998/99 Lecturer: K. Hinde Room: 427 Northumberland Building Tel: 0191 2273936 email: kevin.hinde@unn.ac.uk Web Page:

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

EC508: Microeconomic Theory Midterm 3

EC508: Microeconomic Theory Midterm 3 EC508: Microeconomic Theory Midterm 3 Instructions: Neatly write your name on the top right hand side of the exam. There are 25 points possible. Your exam solution is due Tuesday Nov 24, 2015 at 5pm. You

More information

AGEC 105 Spring 2016 Homework 7. 1. Consider a monopolist that faces the demand curve given in the following table.

AGEC 105 Spring 2016 Homework 7. 1. Consider a monopolist that faces the demand curve given in the following table. AGEC 105 Spring 2016 Homework 7 1. Consider a monopolist that faces the demand curve given in the following table. a. Fill in the table by calculating total revenue and marginal revenue at each price.

More information

3.4. Bertrand Model Bertrand Model

3.4. Bertrand Model Bertrand Model atilde achado 1 In Cournot, firms decide how much to produce and the market price is set such that supply equals demand. But the sentence price is set is too imprecise. In reality how does it work exactly?

More information

Oligopoly is a market structure more susceptible to game-theoretic analysis, because of apparent strategic interdependence among a few producers.

Oligopoly is a market structure more susceptible to game-theoretic analysis, because of apparent strategic interdependence among a few producers. 1 Market structure from a game-theoretic perspective: Oligopoly After our more theoretical analysis of different zero-sum and variable-sum games, let us return to the more familiar territory of economics---especially

More information

NONCOOPERATIVE OLIGOPOLY MODELS

NONCOOPERATIVE OLIGOPOLY MODELS NONCOOPERATIVE OLIGOPOLY MODELS 1. INTRODUCTION AND DEFINITIONS Definition 1 (Oligopoly). Noncooperative oligopoly is a market where a small number of firms act independently but are aware of each other

More information

Market Structure. Market Structure and Behaviour. Perfect competition. PC firm output

Market Structure. Market Structure and Behaviour. Perfect competition. PC firm output Market Structure Market Structure and Behaviour See chapters 10-12 in Mansfield et al Market: firms and individuals buy and sell Important social and legal preconditions Different structures depending

More information

B STRATEGIC INTERACTION IN STATIC INDUSTRIES: OLIGOPOLISTIC COMPETITION

B STRATEGIC INTERACTION IN STATIC INDUSTRIES: OLIGOPOLISTIC COMPETITION Dr. Johannes Paha The Economics of Competition (Law -25- B STRATEGIC INTERACTION IN STATIC INDUSTRIES: OLIGOPOLISTIC COMPETITION Above, we were concerned with the two extremes of market structures, i.e.

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

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

Firm Supply: Market Structure & Perfect Competition

Firm Supply: Market Structure & Perfect Competition Firm Supply: Market Structure & Perfect Competition Firm Supply How does a firm decide how much to supply at a given price? This depends upon the firm s goals; technology; market environment; and competitors

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

Lecture 12: Imperfect Competition

Lecture 12: Imperfect Competition Lecture 12: Imperfect Competition Readings: Chapters 14,15 Q: How relevant are the Perfect Competition and Monopoly models to the real world? A: Very few real world business is carried out in industries

More information

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition

UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES. Monopolistic Competition UNIT 6 cont PRICING UNDER DIFFERENT MARKET STRUCTURES Monopolistic Competition Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on

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

Ecn 221 - Unit 10 Monopolistic Competition & Oligopoly

Ecn 221 - Unit 10 Monopolistic Competition & Oligopoly Ecn 221 - Unit 10 Monopolistic Competition & Oligopoly An industry characterized by monopolistic competition is similar to the case of perfect competition in that there are many firms, and entry into the

More information

Finance 360 Problem Set #8 Solutions

Finance 360 Problem Set #8 Solutions Finance 360 Problem Set #8 Solutions ) Consider the game of chicken. Two players drive their cars down the center of the road directly at each other. Each player chooses SWERVE or STAY. Staying wins you

More information

Chapter 4 : Oligopoly.

Chapter 4 : Oligopoly. Chapter 4 : Oligopoly. Oligopoly is the term typically used to describe the situation where a few firms dominate a particular market. The defining characteristic of this type of market structure is that

More information

Recap from last Session Determination of price and output in the short/long run Non Price Competition

Recap from last Session Determination of price and output in the short/long run Non Price Competition 31 : Oligopoly 1 Recap from last Session Determination of price and output in the short/long run Non Price Competition Session Outline Features of Oligopoly Non-collusive models of oligopoly Non price

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

Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

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

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

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 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

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

CHAPTER 6 MARKET STRUCTURE

CHAPTER 6 MARKET STRUCTURE CHAPTER 6 MARKET STRUCTURE CHAPTER SUMMARY This chapter presents an economic analysis of market structure. It starts with perfect competition as a benchmark. Potential barriers to entry, that might limit

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: 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

Lecture 4: Nash equilibrium in economics: monopolies and duopolies

Lecture 4: Nash equilibrium in economics: monopolies and duopolies Lecture : Nash equilibrium in economics: monopolies and duopolies We discuss here an application of Nash equilibrium in economics, the Cournot s duopoly model. This is a very classical problem which in

More information

Learning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition

Learning Objectives. Chapter 7. Characteristics of Monopolistic Competition. Monopolistic Competition. In Between the Extremes: Imperfect Competition Chapter 7 In Between the Extremes: Imperfect Competition Learning Objectives List the five conditions that must be met for the existence of monopolistic competition. Describe the methods that firms can

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

Oligopoly. What Is Oligopoly? What is Oligopoly?

Oligopoly. What Is Oligopoly? What is Oligopoly? CHAPTER 13B After studying this chapter you will be able to Oligopoly Define and identify oligopoly Explain two traditional oligopoly models Use game theory to explain how price and output are determined

More information

Lecture 11: Oligopoly and Strategic Behavior

Lecture 11: Oligopoly and Strategic Behavior Lecture 11: Oligopoly and Strategic Behavior Few Firms in the Market: Each aware of others actions Each firm in the industry has market power Entry is Feasible, although incumbent(s) may try to deter it.

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

Imperfect Competition

Imperfect Competition Chapter 13 Imperfect Competition 13.1 Motivation and objectives In Chapters 7 11, we considered the pricing decisions of a single firm in isolation, treating its demand curve as fixed. However, a firm

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

Monopolistic Competition, Oligopoly, and maybe some Game Theory

Monopolistic Competition, Oligopoly, and maybe some Game Theory Monopolistic Competition, Oligopoly, and maybe some Game Theory Now that we have considered the extremes in market structure in the form of perfect competition and monopoly, we turn to market structures

More information

Quick Review. Chapter 15: Figure 1 The Four Types of Market Structure

Quick Review. Chapter 15: Figure 1 The Four Types of Market Structure Chapter 16: Oligopoly Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly and do not face so much competition that they are price takers. Types

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

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

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

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

Monopolistic Competition

Monopolistic Competition Introduction to Microeconomics Monopolistic Competition Introduction In this document we refer to imperfect competition as monopolistic competition. Monopolistic competition is described as the situation

More information

Chapter 7: Market Structures Section 3

Chapter 7: Market Structures Section 3 Chapter 7: Market Structures Section 3 Objectives 1. Describe characteristics and give examples of monopolistic competition. 2. Explain how firms compete without lowering prices. 3. Understand how firms

More information

(Perfect) Competition

(Perfect) Competition (Perfect) Competition (Perfect) Competition The model of perfect competition is based on the following assumptions: (Perfect) Competition The model of perfect competition is based on the following assumptions:

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

Midterm 2 (40 points total) (A) (2 points) Define exogenous barriers to entry. Give an example.

Midterm 2 (40 points total) (A) (2 points) Define exogenous barriers to entry. Give an example. Economics 460 Industrial Organization Your Name Midterm (40 points total) Question 1 (7 points) (A) ( points) Define exogenous barriers to entry. Give an example. Exogenous barriers to entry are barriers

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

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

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

CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition CHAPTER 12 MARKETS WITH MARKET POWER Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Summary Now that you understand the model of a perfectly competitive market, this chapter complicates

More information

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is

1 st Exam. 7. Cindy's cross-price elasticity of magazine demand with respect to the price of books is 1 st Exam 1. Marginal utility measures: A) the total utility of all your consumption B) the total utility divided by the price of the good C) the increase in utility from consuming one additional unit

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. Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes

More information

Econ 101A Problem Set 5 Solutions Due in class on Tu 26 November. No late Problem Sets accepted, sorry!

Econ 101A Problem Set 5 Solutions Due in class on Tu 26 November. No late Problem Sets accepted, sorry! Econ 101A Problem Set 5 Solutions Due in class on Tu 26 November. No late Problem Sets accepted, sorry! This Problem set tests the knowledge that you accumulated mainly in lectures 20 to 24. Some of the

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

How to Solve Strategic Games? Dominant Strategies

How to Solve Strategic Games? Dominant Strategies How to Solve Strategic Games? There are three main concepts to solve strategic games: 1. Dominant Strategies & Dominant Strategy Equilibrium 2. Dominated Strategies & Iterative Elimination of Dominated

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

2 Some economics of price discrimination

2 Some economics of price discrimination 1 Price discrimination Price differences are ubiquitous in the real world In-state residents and out-of-state residents pay different tuition to attend the same public university A passenger who purchases

More information

Two broad cases are noteworthy: Monopolistic Competition

Two broad cases are noteworthy: Monopolistic Competition Monopolistic Competition Until now, we have studied two extreme cases of competition: perfect competition and monopoly. Yet, reality is often in between: often, a firm s residual demand curve is downward

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

Equilibrium: Illustrations

Equilibrium: Illustrations Draft chapter from An introduction to game theory by Martin J. Osborne. Version: 2002/7/23. Martin.Osborne@utoronto.ca http://www.economics.utoronto.ca/osborne Copyright 1995 2002 by Martin J. Osborne.

More information

Universidad Carlos III de Madrid Game Theory Problem set on Repeated Games and Bayesian Games

Universidad Carlos III de Madrid Game Theory Problem set on Repeated Games and Bayesian Games Session 1: 1, 2, 3, 4 Session 2: 5, 6, 8, 9 Universidad Carlos III de Madrid Game Theory Problem set on Repeated Games and Bayesian Games 1. Consider the following game in the normal form: Player 1 Player

More information

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly

Learning Objectives. Chapter 6. Market Structures. Market Structures (cont.) The Two Extremes: Perfect Competition and Pure Monopoly Chapter 6 The Two Extremes: Perfect Competition and Pure Monopoly Learning Objectives List the four characteristics of a perfectly competitive market. Describe how a perfect competitor makes the decision

More information

What are the conditions that lead to a perfectly competitive market?

What are the conditions that lead to a perfectly competitive market? Review: Lecture 1. Idea of constrained optimization. Definitions of economics. Role of marginal analysis. Economics as a way to explain. Also used to predict. Chapter 1 and 2. What is a market? What are

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

CHAPTER 13 GAME THEORY AND COMPETITIVE STRATEGY

CHAPTER 13 GAME THEORY AND COMPETITIVE STRATEGY CHAPTER 13 GAME THEORY AND COMPETITIVE STRATEGY EXERCISES 3. Two computer firms, A and B, are planning to market network systems for office information management. Each firm can develop either a fast,

More information

Notes and Sample Questions Chapter 14: Traditional Models of Imperfect Competition

Notes and Sample Questions Chapter 14: Traditional Models of Imperfect Competition Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 4: Traditional Models of Imperfect Competition Thus far, we have discussed two extreme market types: perfect competition and

More information

Intermediate Microeconomics Video Handbook, IM6 Faculty, 2014

Intermediate Microeconomics Video Handbook, IM6 Faculty, 2014 A. MATH TOPICS 1. Calculus Review Machina 2. Elasticity Machina 3. Level Curves Machina a. Level Curves of a Function Machina b. Slopes of Level Curves Machina 4. Scale Properties of Functions a. Scale

More information

UNIT 6. Pricing under different market structures. Perfect Competition

UNIT 6. Pricing under different market structures. Perfect Competition UNIT 6 ricing under different market structures erfect Competition Market Structure erfect Competition ure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the

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

Oligopoly. Chapter 10. 10.1 Overview

Oligopoly. Chapter 10. 10.1 Overview Chapter 10 Oligopoly 10.1 Overview Oligopoly is the study of interactions between multiple rms. Because the actions of any one rm may depend on the actions of others, oligopoly is the rst topic which requires

More information

The Big Picture. Perfect Competition CHAPTER 14 SUMMARY CHAPTER 15 SUMMARY. Firms in Competitive Markets

The Big Picture. Perfect Competition CHAPTER 14 SUMMARY CHAPTER 15 SUMMARY. Firms in Competitive Markets The Big Picture Chapter 13: The cost of production Chapter 14-17:Look at firm s revenue But revenue depends on market structure 1. Competitive market (chapter 14) 2. Monopoly (chapter 15) 3. Oligopoly

More information

Pre-Test Chapter 23 ed17

Pre-Test Chapter 23 ed17 Pre-Test Chapter 23 ed17 Multiple Choice Questions 1. The kinked-demand curve model of oligopoly: A. assumes a firm's rivals will ignore a price cut but match a price increase. B. embodies the possibility

More information

EXERCISE 24 SWEEZY AND CARTEL OLIGOPOLY

EXERCISE 24 SWEEZY AND CARTEL OLIGOPOLY Sweezy and artel Oligopoly 1 EXERISE 24 SWEEZY ND RTEL OLIGOPOLY The Sweezy model, or the kinked demand model, shows that price stability can exist without collusion in an oligopoly. Two firms "squabble"

More information

Building brand awareness in. Jingyu Lee Rutger Ploeger

Building brand awareness in. Jingyu Lee Rutger Ploeger Building brand awareness in dynamic oligopoly markets Jingyu Lee Rutger Ploeger Outline Brand awareness Game theory Oligopoly market Paper Conclusion Questions Brand awareness Brand awareness Brand recognition

More information