Professional Documents
Culture Documents
Teaching/UNVA/Econ 510 F09/Ch09
Teaching/UNVA/Econ 510 F09/Ch09
by
y Paul Farnham
Chapter 9
Market Structure: Oligopoly
9.1
Oligopoly
9.2
Characteristics
off an Oli
Oligopoly
l
Firms have market power derived
9.3
Noncooperative
Oli
Oligopoly
l Models
M d l
Assumes that firms pursue profitmaximizing
g strategies
g
based on
assumptions about rivals behavior
and the impact of this behavior on
th given
the
i
firms
fi strategies
t t i
1. Kinked demand curve model
2. Game theory models
3 Strategic entr
3.
entry deterrence
2005 Prentice Hall, Inc.
9.4
Kinked Demand
C
Curve
Model
M d l
Assumes that a firm is faced with
9.5
Kinked Demand
C
Curve
Model
M d l
Assumes that managers will inflict
maximum damage
g on other firms
Implies oligopoly prices tend to
be sticky
sticky and not change as
they would in other market
structures
Does not explain why price P1
exists initially
2005 Prentice Hall, Inc.
9.6
MC
P1
MR2
D2 = Rivals
dont follow
MR1
0
2005 Prentice Hall, Inc.
Q1
D1 = rivals follow
Q
9.7
9.8
Nash Equilibrium
Strategies for which all players
are choosing
g their best strategy,
gy,
given actions of other players
Proves useful when there is only
one unique equilibrium in the
g
game
There may be multiple Nash
equilibrium
2005 Prentice Hall, Inc.
9.9
Strategic Entry
D t
Deterrence
Policies that prevent rivals from
entering
g the market
Limit pricing: charging a price
9.10
Potential Entrant
Established Firm
MC
ATCEN
PM
PL
0
2005 Prentice Hall, Inc.
A C
PL
ATCM
ATCL
0
ATC
B
F
Q1
Q2
Q
9.11
lower costs
Attracts other firms into the
industry
Established firms can thwart entry
by charging the limit price (or a
lower price) rather than profitmaximization price
2005 Prentice Hall, Inc.
9.12
Predatory Pricing
Figure 9.3
PUS
PJ
PC
PP
T
R S
N
L
J
LRAC = LRMC
M
Demand
MR
QUS QPP QC QP
Q
9.13
Determinates of Successful
P d t
Predatory
Pricing
P i i
How far the predatory price is below
cost
Period of time in which the predatory
price is in effect
Rate of return used for judging the
investment in predatory pricing
How many rivals enter the industry
after predation ends
Time over which recouping
p g of profits
p
occurs
2005 Prentice Hall, Inc.
9.14
Cooperative Oligopoly
M d l
Models
Focus on cooperative behavior
among
g rivals
Two types
Cartels
C t l
Tacit collusion
9.15
Cartels
Firms that get together and agree to
9.16
9.17
When a Cartel
i Successful
is
S
f l
It can raise market price without
9.18
Tacit Collusion
Tacit collusion: coordinated behavior
9.19
9.20
cost curves
Joint profit maximization
Kinked demand curve model
2005 Prentice Hall, Inc.
9.21
9.22
Do you have
any questions?
9.23