Unit 2.6 2016 students.pdf

8/17/2019 Unit 2.6 2016 students.pdf

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Outcomes• Explain the assumptions of oligoplistic markets.

• Discuss, illustrate and comment (whereapplicable) the following theories in oligopolisticmarkets: – Cartel theor

• !llustrate and explain wh an incenti"e exists to forn a cartel.

• Discuss the reasons wh it is difficult to form a cartel andsustain it.

• #se a graph to illustrate and explain the problem of

cheating. – $he kinked demand theor

– %rice leadership theor


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&ssumptions: Oligopolies

1.Few sellers & many buyers

' irms are interdependent

' %rice searcher

' %roduce where C * +

2.Homogeneous or differentiated products

3.Barriers to entry : economies of scale, patents,control o"er resources, legal barriers


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inked demand cur"e

• -h prices are rigid

• +ole of elasticit of demand.


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igure //.//: $he inked Demand Cur"e

0 Quantity

D

MR

R/Q

P*

Q*

MC1

MC2


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%rice leadership theor

• Dominant firm determines price 0 other firms

(price takers) take price as a gi"en.


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igure //.//: %rice 1etting b a Dominant

irm

0 Quantity

P*

Price

Q D Q T

MR D

Q S

S S

MC D

D D

P 2

P 1

D M


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Class example:

• irm & (price leader) * 234 market share

• 1et price * +/3• +est of the firms * 534 market share

•$otal market share * /333 units


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Cartel theor

• irms act as if onl / firm exists in the industr

• &chie"e monopolistic outcomes

• Cartel: an organisation of firms which reduces

output and increase prices to impro"e profits.• 6eha"iour is cooperati"e rather than

competiti"e.


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igure //./7: $he O%EC Oil Cartel

0 Quantity

P*

Price

Q OPEC Q T

MR OPEC

Q C

S S

MC OPEC

D OPEC

P C

D T

Documents

Unit 2.6 2016 students.pdf