microeconomics ch 25

8/12/2019 Microeconomics Ch 25

http://slidepdf.com/reader/full/microeconomics-ch-25 1/37

M i c r o e c o n o m i c

s

Dr. Karim Kobeissi



Chapters 25: O l igopo ly



O V E R V I E W

An oligopoly is an industry comprising a “fe! "rms# A duopoly$ hich

is a special case of oligopoly$ is an industry consisting of to "rms#

%he distinguishing feature of oligopolistic or duopolistic mar&et

structures it is the degree to hich the output$ pricing and other

decisions of one "rm a'ect$ and are a'ected (y$ the similar decision

made (y other "rms in the industry# What is important is theinterdependence of the managerial decisions among the )arious

"rms in the industry# %he analysis oligopolistic (eha)ior may (e

modeled as a non*cooperati)e game in hich the actions of one "rm

to increase mar&et share ill$ unless countered$ result in a reduction

of the mar&et share of other "rms in the industry# %hus$ action ill

(e folloed (y reaction# %his interdependence is the essence of an

analysis of duopolistic or oligopolistic mar&et structures#



Characteristics of an Oligopoly

%he characteristics of oligopoly are:

+# Relati)ely fe sellers$

2# Either standardi,ed or di'erentiated

products$

-# .rice interdependence

/# Relati)ely di0cult entry into and e1it from

the industry



ame %heory

ame theory is perhaps the most important

tool in the economists analytical &it for

analy,ing the strategic (eha)ior# 3trategic

(eha)ior is concerned ith ho indi)iduals

ma&e decisions hen they recogni,e that

their actions a'ect$ and are a'ected (y$ the

actions of other indi)iduals or groups#



ame %heory can also (e illustrated (y hat is called %4E.RI3OER63 7I8E99A#

%he police ha)e enough e)idence to con)ict onnie and Clyde ofpossession of an illegal "rearm so that each ould spend + yearin ;ail# ut they suspect that the to ha)e pulled o' some (an&

ro((eries (ut they ha)e no e)idence# %hey put onnie and Clydein separate rooms and o'er a deal#

“Right no$ e can loc& you up for oneyear# ut if you testify against your

partner$ e ill set you free and yourpartner ill get 2< years in prison# If you(oth confess to the crime$ e can a)oid

the cost of a trial and you (oth get =years#!



%4E .RI3OER36 7I8E99A A9E A7 %4E REA8 WOR87

• %he .risoner6s 7ilemma is an e1ample of a to*

person$ non*cooperati)e$ simultaneous*mo)e$one*shot game in hich (oth players ha)e astrictly dominant strategy#

• A player has a strictly*dominant strategy if it

results in the largest payo' regardless of thestrategy adopted (y other players#

• A ash e>uili(rium occurs in a non*cooperati)egame hen each player adopts a strategy that is

the (est response to hat is (elie)ed to (e thestrategy adopted (y the other players#

• When a game is in ash e>uili(rium$ neitherplayer can impro)e their payo' (y unilaterally

changing strategies#



%4E .RI3OER36 7I8E99A A9E A7 %4E REA8 WOR87?con@

• %he &ey insight of the prisoners6 dilemma game is the tension (eteen

the e>uili(rium outcome (in which both players’ best strategy is toconfess because they can’t trust each other) and the fact that (othplayers could ma&e themsel)es (etter o' if only they ould cooperate# %his tension helps e1plain comple1 e)ents in the real orld#

•

%he Organi,ation of .etroleum E1porting Countries ?O.EC@ pro)ides aclassic e1ample of this tension# O.EC is a cartel that controls a largefraction of the orld6s oil# 8oo&ing at O.EC as a hole$ restricting thesupply of petroleum and &eeping the price of petroleum high is in O.EC6sinterest# eeping the price of petroleum high$ perhaps near B/< a (arrel$hich as the price a(out 2< years ago$ ould ma1imi,e the total

re)enues and pro"ts of the O.EC nations# ut hen the price is this high$the indi)idual interest of each nation lies in pumping more oil than theamount allocated to it under the O.EC agreement# Each nation "guresthat if it and it alone cheats on the output restriction imposed (y thecartel agreement$ the e'ect on the orld price of oil ould (e small (utthe positi)e impact on its pro"t from selling more oil ould (e large# 3o

each nation is tempted to cheat on the cartel#



%he 34ER9A A%I%RD3% AC% ?+=<@ ele)ated agreements

(eteen oligopolists from an unenforcea(le contract to criminalconspiracy#

%he C8AF%O AC% ?++/@ stated that if a person could pro)e

that he as damaged (y an illegal arrangement to restraint oftrade$ that person could sue and recei)e three times the

damages#

%hese las are used to pre)ent oligopolists from actingtogether in ays that ould ma&e their mar&ets less

competiti)e#

N o n c o o p e r a t i v e O l i g o p o l y D u o p o l y



N o n - c o o p e r a t i v e O l i g o p o l y D u o p o l y

Gour popular models of "rm (eha)ior in oligopolisticindustries are:

!)"he #ournot Mo$el is an economic model usedto descri(e an industry structure in hich the tocompanies compete on the >uantities of outputthey ill produce ?to ma1imi,e pro"ts@$ hich

they decide on independently of each other andsimultaneously#

2@ "he %tac&elberg Mo$el is an economic modelused to descri(e an industry structure in hich

the to companies compete on the >uantities ofoutput they ill produce ?to ma1imi,e pro"ts@$hich they decide on independently of eachother and consecuti)ely ?8eader "rm and

Golloer "rm@#

Non cooperative OligopolyDuopoly (con)



Non-cooperative OligopolyDuopoly (con)

')"he %weey Mo$el is an economic model used

to descri(e an industry structure in hich the to

companies compete on the price they ill set to

ma1imi,e pro"ts# Each "rm ill follo a price

decrease (y other "rms in the industry$ (ut illnot follo a price increase#

)"he *ertran$ Mo$el is an economic model used

to descri(e an industry structure in hich each

"rm sets the price of its product to ma1imi,e

pro"ts and ignores the price charged (y its ri)al#



Duopoly

Gi)e Assumptions:

+@ %he to "rms produce a homogeneous product$i#e# there is no product di'erentiation ?e#g#$ ater@#

2@ %he to "rms do not cooperate#

-@ %he to "rms ha)e mar&et poer$ i#e# each "rmHs

output decision a'ects the productHs price#/@ %he "rms are economically rational and act

strategically$ usually see&ing to ma1imi,e pro"tgi)en their competitorsH decisions#

5@ %he to "rms compete on >uantities$ and choose>uantities simultaneously ?each "rm ta&e theoutput >uantity of the other as a gi)en

constant@#



Cournot 9odel of an Airlines 9ar&et

• E1ample: American Airlines andDnited Airlines compete forcustomers on ights (eteen

Chicago and 8os Angeles#

• #ournot e,uilibrium (Nash-

#ournot e,uilibrium) - a set of>uantities sold (y "rms such that$holding the >uantities of all other"rms constant$ no "rm can o(tain a

higher pro"t (y choosing a di'erent



Cournot 9odel of an Airlines 9ar&et?cont@#

Residual Demand Curve

%he mar&et demand that is not met (y

other sellers at any gi)en price#




• 9ar&et demand function is

Q = 339 − p

– p * dollar cost of a one*ay ight – Q total >uantity of the to airlines ?thousands

of passengers ying one ay per >uarter@#

• Each airline has a constant marginal cost$ MC $ and a)erage cost$ AC $ of B+/J perpassenger per ight#




• Residual demand American Airlines faces is:

q A= Q( p) − qU = (339 − p) − qU .

– reriting

p = 339 − q A − qU

• %he marginal re)enue function is:

MRr = 339 − 2q A − qU




• American Airlines6 (est response is theoutput that e>uates its marginalre)enue$ and its marginal cost:

MRr = 339 − 2q A − qU = 147 = MC

– and rearranging

q A = 96−1/2 qU




• Dnited Airlines (est*responsefunction is

qU = 96−1/2 q A

– %his statement is e>ui)alent to saying

that the ash*Cournot e>uili(rium is apoint at hich the (est responsecur)es cross#




• %o sol)e the model:

q A = 96−1/2 (96−1/2 q A )

– and sol)e for q A

.

• 7oing so$ e "nd that

–

qA = 64; qU = 64 – Q = qA + qU = 128.

– ash * Cournot e>uili(rium price isB2++#

microeconomics ch 25

Documents