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Oligopoly

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Characteristics of Oligopoly. Entry and exit from the market is difficult due to barriers ... In the cartel model the oligopoly sets a monopoly price. ... – PowerPoint PPT presentation

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Title: Oligopoly


1
Oligopoly
  • Characteristics of Oligopoly
  • Models of Oligopoly

2
Market Characteristics
Pure Competition
Market Characteristics
Monopolistic Competition
Oligopoly
Monopoly
suppliers Type of goods/service Entry/Exit Mk
t Power Profit
Many Standardized Easy None Normal
Many Differentiated Easy Little Normal
Few Dominate S or D Difficult Large Above
Normal
One Differentiated Impossible Absolute Above
Normal
3
Characteristics of Oligopoly
  • Oligopolies are made up of a small number of
    firms that take into account the expected
    reaction of other firms.

4
Characteristics of Oligopoly
  • The product can be standardized or unique.
  • Crude Oil
  • Corvette

5
Characteristics of Oligopoly
  • Entry and exit from the market is difficult due
    to barriers
  • legal barrier
  • natural barrier
  • sociological barrier

6
Characteristics of Oligopoly
  • Profit can be above normal due to the difficulty
    new firms have competing with existing firms.

7
Oligopoly
  • Characteristics of Oligopoly
  • Models of Oligopoly

8
Models of Oligopoly
  • Models of Oligopoly Behavior
  • The cartel model
  • The contestable market model

9
Models of Oligopoly
  • The Cartel Model
  • A cartel (sometimes called a trust) is a
    combination of firms that acts as it were a
    single firm.
  • A cartel is a shared monopoly.
  • Formal collusion is illegal while informal
    collusion is permitted.

10
Models of Oligopoly
  • The Cartel Model
  • Sometimes the largest or most dominant firm takes
    the lead in setting prices and the others follow.

11
Models of Oligopoly
  • The Contestable Market Model
  • Barriers to entry and to exit determine a firms
    price and output decisions.

12
Models of Oligopoly
  • The Contestable Market
  • Even if the industry contains only one firm, it
    could still be a competitive market if entry is
    open.

13
Models of Oligopoly
  • Comparison of the Two Models
  • In the cartel model the oligopoly sets a monopoly
    price.
  • In the contestable market model with no barriers
    to entry, firms employ competitive pricing.

14
Models of Oligopoly
  • Strategic Pricing and Oligopoly
  • Both the cartel and contestable market models use
    strategic pricing decisionsthey set their prices
    based on the expected reactions of other firms.

15
Models of Oligopoly
  • Price Wars
  • Price wars are the result of strategic pricing
    decisions gone wild.
  • Attempts to drive out the competition

16
Game Theory Strategic Decision Making
  • The Prisoners Dilemma

17
The Prisoners Dilemma Payoff Matrix
A does not confess
A confesses
B does not confess
B confesses
18
The Prisoners Dilemma Payoff Matrix
Amazon.Com
A No Free Shipping
B Free Shipping
1,000
2,000
A No Free Shipping
1,000
- 300
Buy.Com
200
B Free Shipping
- 300
200
2,000
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