CHAPTER 7: Firm Competition and
Market Structure
7.3 Oligopoly and Cartels
Oligopoly
- when a market has multiple sellers
- decisions on output volume will have an
effect on market price.
* sellers in an oligopoly could use as much
market power (strongest) as a monopolist.
Cartel
- restricting competition
- would operate at the same production
volume and price.
- every member firm would sell at the same
price and would set its individual production
volume that every firm operates at the same
marginal cost.
-cartels are usually not tolerated by
governments.
- The collusion that is a necessary
component of a cartel is illegal.
*OPEC oil exporting group is the best
example of a cartel.
*cartels could theoretically function with
the same power as a monopolist.
-cartel price will be well above their
marginal cost, they could profit individually
by increasing their own production.
Problem in dividing profits in cartels:
Example: a cartel had two member firms; A
and B.
*A has more efficient facilities than firm B
Solution: Firm A is allowed to provide bulk
of the production volume. But, A claims that
their share in profits should be proportional
to their share in production volume and B
will object and the arrangement could end.
Optimal cartel operation
- all firms set production so all have the
same marginal cost
- firms need to share internal information for
the cartel to determine the TOTAL
VOLUME where MARGINAL REVENUE
EQUALS MARGINAL COST and how that
volume gets divided between firms.
*some firms can keep their operation details
private from other firms
7.4 Production Decisions in Non Cartel
Oligopolies
*expected operation of the firm in perfect
competition or in monopoly / cartel is
straightforward.
*If the firm in perfect competition
understands its production costs, it will
increase volume up to the point where its
marginal cost exceeds the price.
*For the monopolist / cartel, production
should increase up to the point where
marginal cost equals marginal revenue.
*A major reason for complexity in
determining the optimal production level
is that the firm does not know its oligopoly
competitors will respond to its production
decisions.
Bertrand Model or Price Competition
- the assumption that all firms can anticipate
the prices that will be charged by their
competitors.
Cournot Model or Quantity Model
- assume all firms can determine the
upcoming production levels or operating
capacities of their competitors.
Leader firm
- will make a decision on either its price or
its volume / capacity commitment and then
the remaining “follower firms” determine
how they will react.