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
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 2/37
Chapters 25: O l igopo ly
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 3/37
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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 4/37
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
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 5/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 6/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 7/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 8/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 9/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 10/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 11/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 12/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 13/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 14/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 15/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 16/37
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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 17/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 18/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 19/37
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#!
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 20/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 21/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 22/37
%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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 23/37
%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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 24/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 25/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 26/37
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 27/37
%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
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 28/37
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)
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 29/37
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$el is an economic model used
to descri(e an industry structure in hich each
"rm sets the price of its product to ma1imi,e
pro"ts and ignores the price charged (y its ri)al#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 30/37
Duopoly
Gi)e Assumptions:
+@ %he to "rms produce a homogeneous product$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@#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 31/37
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
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 32/37
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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 33/37
Cournot 9odel of an Airlines 9ar&et?cont@#
• 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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 34/37
Cournot 9odel of an Airlines 9ar&et?cont@#
• 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
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 35/37
Cournot 9odel of an Airlines 9ar&et?cont@#
• 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
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 36/37
Cournot 9odel of an Airlines 9ar&et?cont@#
• 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#
8/12/2019 Microeconomics Ch 25
http://slidepdf.com/reader/full/microeconomics-ch-25 37/37
Cournot 9odel of an Airlines 9ar&et?cont@#
• %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++#