Sweezy Oligopoly

Here we introduce the notion of

Oligopoly and look at one particular
model.

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 Oligopoly
In general, oligopoly is a market structure where there are a
few firms in the industry. Examples might be the auto
industry, soft drink industry or the computer operating system
industry.
A key feature of oligopoly is that firms understand their
interdependence. The outcome for one firm depends upon
what other firms in the industry do.

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 Sweezy model
A key assumption of the Sweezy model of oligopoly is that
each firm believes that
1) Rivals will not match price increases,
2) Rivals will match price declines.
You and I know consumers buy less at higher prices. If a firm
raises price the consumers want less. With the assumptions
above, when a firm raises its price, not only do consumers
want less, but the firm will lose some to other sellers
because they have not matched the higher price.

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 Sweezy model
Since other firms match price decreases, the only consumers
you will get are those that want the good at the lower price,
but you won’t steal from other firms because they match your
lower price.
The reasoning above leads to a demand curve for a firm that
has a “kink” in it at the current price. Let’s see this on the
next screen.

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 Kinked demand
P
The steep demand is
when others follow the
price change – we only
use the bottom half. The
flat demand is when
others do not match the
price change – we use the
top half. The demand for
the firm is the solid
Q
segments.

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P MR
We saw before when
demand is downward
sloping the MR is as
well. Here we just take
the relevant piece of
MR from the relevant
demand.
The MR curve is also
kinked and has a
Qhorizontal segment.

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P MC = MR

With MR having a
MC vertical range, MC has a
range range where it can come
through and give the
same price and output
level.

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 Conclusion
The Sweezy model is useful when we see an oligopoly
industry that does not change much in terms of pricing and
output decisions. MC can come through in a large range and
not change P or Q.
This model has limited relevance and we need to study other
situations as well.

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 P

D
MR Q

An idea we established before is that at a given quantity the price on

the demand curve is higher than the MR.
Another point to consider is that at a given dollar amount the
quantity on the MR is one-half the quantity on the demand curve.
For Example, in the graph I have a horizontal line at the height
shown. If the quantity is 20 on the demand the quantity is 10 on the
MR. 9