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OLIGOPOLY

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OLIGOPOLY. A FEW SELLERS. CHARACTERISTICS. Market Power. Interdependence. MARKET POWER: DETERMINANTS ... of total sales by one firm. Market share of firm ... – PowerPoint PPT presentation

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Title: OLIGOPOLY


1
OLIGOPOLY
  • A FEW SELLERS

2
CHARACTERISTICS
  • Market Power
  • Interdependence

3
MARKET POWER DETERMINANTS
  • Number of producers
  • Concentration ratio
  • sales by top 4 firms
  • Firm size
  • sales

4
MARKET POWER DETERMINANTS
  • Barriers to entry
  • Higher -- greater market power
  • Availability of substitutes
  • None/few greater market power
  • Many less market power

5
INTERDEPENDENCE
  • Market Share
  • of total sales by one firm
  • Market share of firm increases?
  • Clearly at expense of competitors
  • So, if Firm A drops price to increase sales..
  • Retaliation competitors drop price
  • Result?
  • Market shares unchanged but
  • now all are charging lower price

6
KINKED DEMAND CURVE
  • Originparts of 2 demand curves
  • Assumption Competitors will
  • match price decreases
  • ignore price increases
  • Price is sticky at the kink

7
MARGINAL REVENUE CURVE
  • Origin .. Parts of 2 MR curves
  • Use the part of MR curve
  • that goes with part of D curve
  • Result?
  • MR curve with a gap
  • Allows producer to absorb some cost increases
    without having to raise price

8
GAME THEORY
  • Method of guestimating
  • competitors possible reactions to price changes
  • and impact on your firm

9
PROFIT MAXIMIZATION RULE
  • Produce Q where MC MR
  • If
  • P gt AVC
  • Expectations for oligopolist
  • P gt ATC
  • Profit made

10
NON-PRICE COMPETITION
  • Ways of competing OTHER than lowering price
  • Oligopolist do this a lot
  • (Its safer than price competition)
  • Seek to make D more inelastic

11
NON-PRICE COMPETITIONMETHODS
  • Product differentiation
  • Make yours different (better?) than others
  • Advertising
  • Warranties
  • Service
  • Store appearance/accessibility
  • Note Non-price competition costs money

12
OLIGOPOLIST v COMPETITOR
  • P gt ATC
  • Not productive efficiency
  • P gt MC
  • Not allocative efficiency
  • Underallocation of resources

13
COLLUSION ILLEGAL in US
  • Price-fixing
  • Firms agree on price they will all charge
  • Allows them to act as monopoly
  • Price Leadership
  • One firm increases price
  • Others follow suit
  • Allocation of Market Shares
  • Firms agree to divide up the market

14
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