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Oligopoly. Oligopoly: Few Sellers. PURE. Oligopoly. VS. DIFFERENTIATED. Oligopoly. ( Single and clustered prices respectively.). Oligopoly: Few Sellers. Principal characteristic: Interdependence.

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Oligopoly: Few Sellers

PURE

Oligopoly

VS.

DIFFERENTIATED

Oligopoly

(Single and clustered prices respectively.)

oligopoly few sellers
Oligopoly: Few Sellers

Principal characteristic: Interdependence

Great uncertainty facing the oligopolist is the result. Any policy action will elicit a reaction from competitors; hence, the uncertainty. Analytical precision, therefore, is impossible, and many oligopoly models have been developed. There is no general theory, and the kinked case is but one model.

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Theory of Cartels

Interdependence and Uncertainty

The centralized cartel is the case of centralized decision making, with the organization determining price and output quotas.

Objectives:

1) minimize industry costs for any given output (produce where all firms have the same MC).

2) restrict output and maximize industry-wide profits. Sum MXC curves to find industry-wide S curve. Equate that to MR, and sell from the related demand curve. Each firm produce the quota where short-run industry MC = industry MR

slide5

Motivations for Collusion

a) Decrease competition, achieve monopoly-like behavior

b) Decrease uncertainty

c) Decrease ease of entry

Case of the centralized cartel...

(perfect collusion)

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$

$

$

MCa

MC

ACa

MCb

ACb

0

X

0

X

0

X

Qa

Qb

Qc

Collusion

Decision making is carried on by the central organization. It sets price and output. (The ideal case is illegal in the U.S. and seldom reached, probably, elsewhere.)

Firm A

Firm B

Industry

D

MR

Objective: Minimize industry costs for any given output. Allocate quotas to members so the MC of each producing firm at its quota output is equal to MC of every other firm.

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Theory of Cartels

The key to a very high price is the inelasticity of demand.

  • The cartel’s inelastic demand depends upon:
    • world Ed for the product
    • E of supply of competing non-cartel producers
    • the cartel’s share of the world market

A successfully high price starts all these factors gradually working against the cartel. The world searches for substitute, non-cartel producers to try to increase supplies and decrease the cartel’s market share.

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$

$

$

MCa

MC

ACa

MCb

D

ACb

MR

0

X

0

X

0

X

Qa

Qa

Qb

Qc

Motivation for Independent Action

If a single firm can successfully break away from the cartel, and gain more customers by lowering price and increasing sales beyond its former quota, it increases profits. If everybody breaks, the old pre-cartel problems reappear.

Firm A

Firm B

Industry

D

MR

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International Cartels

Cartels: Collusion among oligopolists--agreement to restrict selling competition.

Centripetal and centrifugal forces of cartels-- reason for their expected short mortality.

OPEC was slow in validating that prediction.

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