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

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

Y’s price

D

C

£12m for Y

£5m for X

£1.80

£8m each

OLIGOPOLY
• Non-collusive oligopoly: game theory
• simple dominant strategy games
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

OLIGOPOLY
• Non-collusive oligopoly: game theory
• alternative strategies: maximax and maximin
• simple dominant strategy games
• 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

OLIGOPOLY
• Non-collusive oligopoly: game theory

-simple dominant strategy games

• the prisoners’ dilemma
• Nash equilibrium

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

OLIGOPOLY
• Non-collusive oligopoly: assumptions about rivals’ behaviour
• The Cournot model of duopoly
• assumption that rival will produce a given quantity

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

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

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

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

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

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

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