Oligopoly
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Oligopoly. OLIGOPOLY. Key features of oligopoly barriers to entry interdependence of firms incentives to compete. OLIGOPOLY. Non-collusive oligopoly: game theory. Profits for firms A and B at different prices. X’s price. £2.00. £1.80. B. A. £5m for Y £12m for X. £2.00. £10m each.

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Oligopoly

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Oligopoly

Oligopoly


Oligopoly1

OLIGOPOLY

  • Key features of oligopoly

    • barriers to entry

    • interdependence of firms

    • incentives to compete


Oligopoly2

OLIGOPOLY

  • Non-collusive oligopoly: game theory


Profits for firms a and b at different prices

Profits for firms A and B at different prices

X’s price

£2.00

£1.80

B

A

£5m for Y

£12m for X

£2.00

£10m each

Y’s price

D

C

£12m for Y

£5m for X

£1.80

£8m each


Oligopoly3

OLIGOPOLY

  • Non-collusive oligopoly: game theory

    • simple dominant strategy games


Profits for firms a and b at different prices1

Profits for firms A and B at different prices

X’s price

£2.00

£1.80

B

A

£5m for Y

£12m for X

£2.00

£10m each

Y’s price

D

C

£12m for Y

£5m for X

£1.80

£8m each


Oligopoly4

OLIGOPOLY

  • Non-collusive oligopoly: game theory

    • alternative strategies: maximax and maximin

    • simple dominant strategy games

      • the prisoners’ dilemma


The prisoners dilemma

The prisoners' dilemma

Amanda's alternatives

Not confess

Confess

B

A

Nigel gets

10 years

Amanda gets

3 months

Not

confess

Each gets

1 year

Nigel's

alternatives

D

C

Nigel gets

3 months

Amanda gets

10 years

Each gets

3 years

Confess


Oligopoly5

OLIGOPOLY

  • Non-collusive oligopoly: game theory

    -simple dominant strategy games

    • the prisoners’ dilemma

    • Nash equilibrium


Oligopoly

A decision tree

Boeing –£10m

Airbus –£10m

(1)

500 seater

Airbus

decides

B1

400 seater

Boeing +£30m

Airbus +£50m

(2)

500 seater

Boeing +£50m

Airbus +£30m

(3)

400 seater

500 seater

B2

400 seater

Airbus

decides

Boeing –£10m

Airbus –£10m

(4)

Boeing

decides

A


Oligopoly6

OLIGOPOLY

  • Non-collusive oligopoly: assumptions about rivals’ behaviour

    • The Cournot model of duopoly

      • assumption that rival will produce a given quantity


The cournot model of duopoly

MCA

DM

DA1

QB1

The Cournot model of duopoly

£

Firm A believes that firm B will produce QB1.

O

Quantity

(a) Firm A’s profit-maximising position


Oligopoly7

OLIGOPOLY

  • Non-collusive oligopoly: assumptions about rivals’ behaviour

    • The Cournot model of duopoly

      • assumption that rival will produce a given quantity

      • profit-maximising price and output for firm A


The cournot model of duopoly1

PA1

MRA1

QA1

The Cournot model of duopoly

£

MCA

Firm A’s profit-maximising output and price are QA1 and PA.

DM

DA1

O

QB1

Quantity

(a) Firm A’s profit-maximising position


Oligopoly8

OLIGOPOLY

  • Non-collusive oligopoly: assumptions about rivals’ behaviour

    • The Cournot model of duopoly

      • assumption that rival will produce a given quantity

      • profit-maximising price and output for firm A

      • reaction functions of firms A and B


The cournot model of duopoly2

Firm A’s reaction function for each assumed output of B

RA

Firm B’s reaction function for each assumed output of A

x

QB1

RB

QA1

The Cournot model of duopoly

£

MCA

Firm B’s output

PA1

DM

DA1

MRA1

O

QA1

O

QB1

Firm A’s output

Quantity

(b) The two firms’ reaction functions

(a) Firm A’s profit-maximising position


Oligopoly9

OLIGOPOLY

  • Non-collusive oligopoly: assumptions about rivals’ behaviour

    • The Cournot model of duopoly

      • assumption that rival will produce a given quantity

      • profit-maximising price and output for firm A

      • reaction functions of firms A and B

      • Cournot equilibrium


The cournot model of duopoly3

e

QBe

RB

QAe

The Cournot model of duopoly

Equilibrium at point e, where the two reaction functions cross

£

RA

MCA

Firm B’s output

PA1

x

QB1

DM

DA1

MRA1

QA1

O

QA1

O

QB1

Firm A’s output

Quantity

(b) The two firms’ reaction functions

(a) Firm A’s profit-maximising position


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