Oligopoly, Collusion, and Antitrust

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Oligopoly, Collusion, and Antitrust
Oligopoly is derived from the Greek word olig
meaninga small number or a few.

• ? Characteristics of oligopoly
• Fewness of sellers
• Seller interdependence
• Feasibility of coordinated action among rival
  firms

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Seller Interdependence
Oligopolistic firmsmake strategic decisions
(pricing, advertising, expansion) partlybased
on conjecturesabout the likely reactionof rival
firms

• If Kroger offers deep discounts on Pepsi, will
  Wal-Mart follow suit?
• How will MCI and ATT react to the latest long
  distance marketing pitch by Sprint?
• If Gateway offers permits buyers to trade-in
  their old PC, what reaction might be expected
  from Micron, Dell, or Compaq?
• Northwest frequent flyer miles never
  expire--what does Delta do?

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This is useful for illustratingthe principle of
seller interdependenceand also for analyzing the
behaviorof firms in tightly concentratedmarket
structures
Game Theory
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The Prisoners' Dilemma
Ralph and Gertie have been charged with bank
robbery. But without a confession, the DA can
only get a recklessendangerment charge to
stick. So thepolice play the ole lets make a
dealgame.
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OK, Gertie. Confess,rat on Ralph, and you
avoidprison. But this deal may notlast--we have
made thesame offerto Ralph!
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The Payoff Matrix
Gerties Options
Confess
Dont Confess
Dont Confess
2, 2
0, 10
Ralphs Options
10, 0
6, 6
Confess
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Confess is the dominantstrategy, since it gives
bestbest payoff irrespective of thestrategy
selected by the other player
Dominant Strategy
Defined as the strategy that yields the best
resultfor each strategy selected by the other
player
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Advertising Rivalry

• ? Pizza Planet and Luigis are rivals in the
  market for home-delivered pizza. Each rival seeks
  to gain an advantage through advertising (product
  differentiation).
• Advertising is presumed NOT to affect market
  demand--only market share.
• Market share depends on the intensity of
  advertising relative to ones rival.

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• Let
• P 15
• Q 100 pizzas (market quantity-demanded)
• ATC (w/o advertising expense)
  5.Hence?/Pizza (TR - TC)/Q (1500 -
  500)/100 10?Therefore, if neither seller
  advertises, each will sell 50 pizzas and earn a
  profit of 500. However,advertising could
  potentially increase sales to 75 pizzas.

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• Let
• P 15
• Q 100 pizzas (market quantity-demanded)
• ATC (w/o advertising expense)
  5.Hence?/Pizza (TR - TC)/Q (1500 -
  500)/100 10?Therefore, if neither seller
  advertises, each will sell 50 pizzas and earn a
  profit of 500. However,advertising could
  potentially increase sales to 75 pizzas.

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Pizza and Luigis may select a low strategy
(meaning a 100 outlay for advertising) or a
high strategy(200 outlay for advertising)
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Thedominantstrategy is High
The Payoff Matrix
Pizza Planets Options
High
Low
Low
400, 400
150, 550
Luigis Options
550, 150
300, 300
High