Oligopoly

1
Chapter 26

• Oligopoly Strategic Behavior

2
A Few Questions

• What cellular services are being represented in
  here?
• Should there be a better variety of cell
  companies?

3
A Few Questions

• Are any of these companies monopolies?
• (Review) How do these companies compete?

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Oligopoly

• This is a new type of Market Structure
• Oligopoly a situation when there are only a few
  sellers
• Each seller will react to the changes made by
  another one

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Oligopoly (cont.)

• Characteristics
• Small of Sellers
• Firms are all Interdependent

Strategic Dependence one firms actions may be
strategically countered by another firm
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Strategic Dependence

• When Sprint first offered Nationwide
  Long-Distance, what did the other firms do?

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Cellular Competition

• What other features do cell firms offer?

-Anytime Minutes -Camera Phones -Wireless
Web -Video Phones
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Oligopoly Creation

• Origins come about because of
• Economies of Scale
• Barriers To Entry
• Mergers

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Mergers

• 2 Types of Mergers
• Vertical Merger the joining of a firm to
  another, to which it sells an output, or buys an
  input
• Can somebody translate?

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Vertical Mergers

• Example

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Mo Mergers

• Horizontal Mergers the joining of 2 companies
  that produce or sell the same product

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Big Small

• Some companies will always make up a large
  percentage of an industry.
• Think of the shoe market

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• Industry Example

Firm Annual Sales ( Millions)
1 150 2 100 3 80 4 70 5-25 50
400

4-Firm Concentration Ratio
_____ 450
400/450 88.9
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Oligopolistic Concentration

• Oligopolistic is argumentative
• Lets say 75

4-Firm Concentration
Tobacco 93 Brkfst Cereal 85 Cars (Domestic)
84 Text pg 631
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Reaction Function

• If you were part of an Oligopoly, how can you
  predict what a firm will do?
• Reaction Function the manner in which 1
  oligopolist reacts to a change by another

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Lets Play A Game

• Game Theory
• Attempts to predict possible outcomes that can
  affect a market
• Remember what you paid for insurance in your Cost
  of Living Project?

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Prediction Example

• Insurance companies attempt to predict how much
  they will have to pay out
• How do they do that?

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Prediction Example (cont.)

• Not all insurance payouts can be predicted

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Lifes A Game

• 2 Types of Games
• Cooperative Game
• Noncooperative Game

Anyone care to define these?
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Cant We All Just Get Along?

• Cooperative Game players will cooperate in
  order to make themselves better off

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• Noncooperative Game players will neither work
  together nor negotiate with each other
• Prisoners Dilemma

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Opportunistic Behavior

• Opportunistic Behavior ignoring the long-run
  good, for the short-run gain

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Games, Games, More Games

• Zero-Sum Game - __________
• ________________________

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Dont Play This Game

• Negative-Sum Game - ______
• ____________________________

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How To Behave?

• Positive-Sum Game - _______
• ____________________________

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Use Good Strategery

• Dominant Strategy -

Any strategy that will yield the highest
benefit Regardless of what others do
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What Happens When You Assume?

• So how does a company assume what a rival will
  do?
• Answer The Kinked Demand Curve

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Follow The Leader

• Price Leadership One Oligopolist firm publishes
  their price list, and others match it

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EnterIf You Can

• Entry Deterrence Strategy
• Keep out new firms how?

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Market Feedback

• The consumer will always give a firm the answers
  they need
• Positive Market Feedback
• Negative Market Feedback