Chapter 12

Chapter 12
Monopolistic
Competition and
Oligopoly
Topics to be Discussed
 Monopolistic Competition
 Oligopoly
 Price Competition
 Competition Versus Collusion: The
Prisoners’ Dilemma
Chapter 12 Slide 2
Topics to be Discussed
 Implications of the Prisoners’ Dilemma

for Oligopolistic Pricing
 Cartels
Chapter 12 Slide 3
Monopolistic Competition
 Characteristics
1) Many firms
2) Free entry and exit
3) Differentiated product
Chapter 12 Slide 4
 The amount of monopoly power depends

on the degree of differentiation.
 Examples of this very common market
structure include:
 Toothpaste
 Soap
 Cold remedies
Chapter 12 Slide 5
 Toothpaste
 Crest and monopoly power
 Procter & Gamble is the sole producer of
Crest
 Consumers can have a preference for
Crest---taste, reputation, decay preventing
efficacy
 The greater the preference (differentiation)
the higher the price.
Chapter 12 Slide 6
 Question
 Does Procter & Gamble have much monopoly
power in the market for Crest?
Chapter 12 Slide 7
 The Makings of Monopolistic Competition

 Two important characteristics
 Differentiated but highly substitutable
products
 Free entry and exit
Chapter 12 Slide 8
A Monopolistically Competitive
Firm in the Short and Long Run
$/Q Short Run $/Q Long Run

MC MC
AC AC
PSR
PLR
DSR
DLR
MRSR
MRLR
QSR Quantity QLR Quantity

 Observations (short-run)
 Downward sloping demand--differentiated
product
 Demand is relatively elastic--good substitutes
 MR <P
 Profits are maximized when MR = MC
 This firm is making economic profits
Chapter 12 Slide 10
 Observations (long-run)
 Profitswill attract new firms to the industry
(no barriers to entry)
 The old firm’s demand will decrease to DLR
 Firm’s output and price will fall
 Industry output will rise
 No economic profit (P = AC)
P > MC -- some monopoly power
Chapter 12 Slide 11
Comparison of Monopolistically Competitive
Equilibrium and Perfectly Competitive Equilibrium
Perfect Competition Monopolistic Competition

$/Q $/Q
Deadweight
MC AC loss MC AC
P
PC
D = MR
DLR
MRLR
QC Quantity QMC Quantity

 Monopolistic Competition and Economic

Efficiency
 The monopoly power (differentiation) yields
a higher price than perfect competition. If
price was lowered to the point where
MC = D, consumer surplus would increase
by the yellow triangle.
Chapter 12 Slide 13
 Monopolistic Competition and Economic

Efficiency
 With no economic profits in the long run,
the firm is still not producing at minimum
AC and excess capacity exists.
Chapter 12 Slide 14
 Questions
1) If the market became competitive,
what would happen to output
and price?
2) Should monopolistic competition
be regulated?
Chapter 12 Slide 15
 Questions
3) What is the degree of monopoly
power?
4) What is the benefit of product
diversity?
Chapter 12 Slide 16
in the Market for Colas and Coffee
 The markets for soft drinks and coffee

illustrate the characteristics of
monopolistic competition.
Chapter 12 Slide 17
Elasticities of Demand for
Brands of Colas and Coffee
Brand Elasticity of Demand
Colas: Royal Crown -2.4

Coke -5.2 to -5.7
Ground Coffee: Hills Brothers -7.1
Maxwell House -8.9
Chase and Sanborn -5.6
Chapter 12 Slide 18
Elasticities of Demand for
Brands of Colas and Coffee
 Questions
1) Why is the demand for Royal Crown
more price inelastic than for Coke?
2) Is there much monopoly power in
these two markets?
3) Define the relationship between
elasticity and monopoly power.
Chapter 12 Slide 19
Oligopoly
 Characteristics
 Small number of firms
 Product differentiation may or may not
exist
 Barriers to entry
Chapter 12 Slide 20
Oligopoly
 Examples
 Automobiles
 Steel
 Aluminum
 Petrochemicals
 Electrical equipment
 Computers
Chapter 12 Slide 21
Oligopoly
 The barriers to entry are:

 Natural
 Scale economies
 Patents
 Technology
 Name recognition
Chapter 12 Slide 22
Oligopoly
 The barriers to entry are:

 Strategic action
 Flooding the market
 Controlling an essential input
Chapter 12 Slide 23
Oligopoly
 Management Challenges
 Strategic actions
 Rival behavior
 Question
 What are the possible rival responses to a
10% price cut by Ford?
Chapter 12 Slide 24
Oligopoly
 Equilibrium in an Oligopolistic Market

 In perfect competition, monopoly, and
monopolistic competition the producers did
not have to consider a rival’s response
when choosing output and price.
 In oligopoly the producers must consider
the response of competitors when
choosing output and price.
Chapter 12 Slide 25
Oligopoly
 Equilibrium in an Oligopolistic Market

 Defining Equilibrium
 Firms doing the best they can and have
no incentive to change their output or
price
 All firms assume competitors are taking
rival decisions into account.
Chapter 12 Slide 26
Oligopoly
 Nash Equilibrium
 Each firm is doing the best it can given
what its competitors are doing.
Chapter 12 Slide 27
Oligopoly
 The Cournot Model

 Duopoly
 Two firms competing with each other
 Homogenous good
 The output of the other firm is assumed
to be fixed
Chapter 12 Slide 28
Firm 1’s Output Decision
If Firm 1 thinks Firm 2 will
P1 produce nothing, its demand
curve, D1(0), is the market
D1(0)
demand curve.
If Firm 1 thinks Firm 2 will produce
50 units, its demand curve is
shifted to the left by this amount.
If Firm 1 thinks Firm 2 will produce

75 units, its demand curve is
MR1(0) shifted to the left by this amount.
D1(75)
MR1(75)
MC1
What is the output of Firm 1

MR1(50) D1(50)
if Firm 2 produces 100 units?
12.5 25 50 Q1
Chapter 12 Slide 29
Oligopoly
 The Reaction Curve

A firm’s profit-maximizing output is a
decreasing schedule of the expected
output of Firm 2.
Chapter 12 Slide 30
Reaction Curves
and Cournot Equilibrium
Firm 1’s reaction curve shows how much it
Q1 will produce as a function of how much
it thinks Firm 2 will produce. The x’s
100 correspond to the previous model.
Firm 2’s reaction curve shows how much it

will produce as a function of how much
75 it thinks Firm 1 will produce.
Firm 2’s Reaction
Curve Q*2(Q2)
In Cournot equilibrium, each

50 x firm correctly assumes how
Cournot
Equilibrium much its competitors will
produce and thereby
maximize its own profits.
25 x
Firm 1’s Reaction
Curve Q*1(Q2) x
x
25 50 75 100 Q2
Chapter 12 Slide 31
Oligopoly
 Questions
1) If the firms are not producing at the

Cournot equilibrium, will they
adjust until the Cournot equilibrium
is reached?
2) When is it rational to assume that

its competitor’s output is fixed?
Chapter 12 Slide 32
Oligopoly
The Linear Demand Curve
 An Example of the Cournot Equilibrium

 Duopoly
 Market demand is P = 30 - Q where Q =
Q1 + Q2
 MC1 = MC2 = 0
Chapter 12 Slide 33
Oligopoly

 Firm 1’s Reaction Curve
Total Revenue, R1  PQ1  (30  Q )Q1

 30Q1  (Q1  Q2 )Q1
 30Q1  Q12  Q2Q1
Chapter 12 Slide 34
Oligopoly

MR1  R1 Q1  30  2Q1  Q2
MR1  0  MC1
Firm 1' s Reaction Curve
Q1  15  1 2 Q2
Firm 2' s Reaction Curve
Q2  15  1 2 Q1
Chapter 12 Slide 35
Oligopoly
Cournot Equilibriu m : Q1  Q2
15  1 2(15  1 2Q1 )  10
Q  Q1  Q2  20
P  30  Q  10
Chapter 12 Slide 36
Duopoly Example
Q1
The demand curve is P = 30 - Q and
30 both firms have 0 marginal cost.
Firm 2’s
Reaction Curve
Cournot Equilibrium
15
10
Firm 1’s
Reaction Curve
10 15 30 Q2
Chapter 12 Slide 37
Oligopoly
Profit Maximization with Collusion
2
R  PQ  (30  Q)Q  30Q  Q
MR  R Q  30  2Q
MR  0 when Q  15 and MR  MC
Chapter 12 Slide 38
Oligopoly
Profit Maximization with Collusion
 Contract Curve
 Q1 + Q2 = 15
 Shows all pairs of output Q1 and Q2 that
maximizes total profits
 Q1 = Q2 = 7.5
 Less output and higher profits than the
Cournot equilibrium
Chapter 12 Slide 39
Duopoly Example
Q1
30
Firm 2’s For the firm, collusion is the best
Reaction Curve outcome followed by the Cournot
Equilibrium and then the
competitive equilibrium
Competitive Equilibrium (P = MC; Profit = 0)

15 Cournot Equilibrium
10 Collusive Equilibrium
7.5 Firm 1’s

Reaction Curve
Collusion
Curve
7.5 10 15 30 Q2
Chapter 12 Slide 40
First Mover Advantage--
The Stackelberg Model
 Assumptions
 One firm can set output first
 MC =0
 Market demand is P = 30 - Q where Q =
total output
 Firm 1 sets output first and Firm 2 then
makes an output decision
Chapter 12 Slide 41
 Firm 1
 Must consider the reaction of Firm 2
 Firm 2
 Takes Firm 1’s output as fixed and
therefore determines output with the
Cournot reaction curve: Q2 = 15 - 1/2Q1
Chapter 12 Slide 42
 Firm 1
 Choose Q1 so that:
MR  MC, MC  0 therefore MR  0
R1  PQ1  30Q1 - Q12 - Q2Q1
Chapter 12 Slide 43
 Substituting Firm 2’s Reaction Curve

for Q2:
R1  30Q1  Q12  Q1 (15  1 2Q1 )
 15Q1  1 2 Q12
MR1  R1 Q1  15  Q1

MR  0 : Q1  15 and Q2  7.5
Chapter 12 Slide 44
 Conclusion
 Firm 1’s output is twice as large as firm 2’s
 Firm 1’s profit is twice as large as firm 2’s
 Questions
 Why is it more profitable to be the first
mover?
 Which model (Cournot or Shackelberg) is
more appropriate?
Chapter 12 Slide 45
Price Competition
 Competition in an oligopolistic industry

may occur with price instead of output.
 The Bertrand Model is used to illustrate
price competition in an oligopolistic
industry with homogenous goods.
Chapter 12 Slide 46
Price Competition
Bertrand Model
 Assumptions
 Homogenous good
 Market demand is P = 30 - Q where
Q = Q1 + Q2
 MC = $3 for both firms and MC1 = MC2 = $3
Chapter 12 Slide 47
Price Competition
Bertrand Model
 Assumptions
 The Cournot equilibrium:
 P  $12
 for both firms  $81
 Assume the firms compete with price, not
quantity.
Chapter 12 Slide 48
Price Competition
Bertrand Model
 How will consumers respond to a

price differential? (Hint: Consider
homogeneity)
 The Nash equilibrium:

P = MC; P1 = P2 = $3

Q = 27; Q1 & Q2 = 13.5
  0
Chapter 12 Slide 49
Price Competition
Bertrand Model
 Why not charge a higher price to raise

profits?
 How does the Bertrand outcome compare to
the Cournot outcome?
 The Bertrand model demonstrates the
importance of the strategic variable (price
versus output).
Chapter 12 Slide 50
Price Competition
Bertrand Model
 Criticisms
 When firms produce a homogenous good, it
is more natural to compete by setting
quantities rather than prices.
 Even if the firms do set prices and choose
the same price, what share of total sales
will go to each one?
 It may not be equally divided.
Chapter 12 Slide 51
Price Competition
 Price Competition with Differentiated

Products
 Market shares are now determined not just
by prices, but by differences in the design,
performance, and durability of each firm’s
product.
Chapter 12 Slide 52
Price Competition
Differentiated Products
 Assumptions
 Duopoly
 FC = $20
 VC =0
Chapter 12 Slide 53
Price Competition
 Assumptions
 Firm 1’s demand is Q1 = 12 - 2P1 + P2
 Firm 2’s demand is Q2 = 12 - 2P1 + P1
 P1 and P2 are prices firms 1 and 2 charge
respectively
 Q1 and Q2 are the resulting quantities
they sell
Chapter 12 Slide 54
Price Competition
 Determining Prices and Output
 Set prices at the same time
Firm 1 :  1  P1Q1  $20

 P1 (12  2 P1  P2 )  20
2
 12 P1 - 2 P  P1 P2  20
1
Chapter 12 Slide 55
Price Competition
 Determining Prices and Output

 Firm 1: If P2 is fixed:
Firm 1' s profit maximizing price 
 1 P1  12  4 P1  P2  0
Firm 1' s reaction curve 
P1  3  1 4 P2
Firm 2' s reaction curve 
P2  3  1 4 P1
Chapter 12 Slide 56
Nash Equilibrium in Prices
P1 Firm 2’s Reaction Curve
Collusive Equilibrium
$6
$4
Firm 1’s Reaction Curve
Nash Equilibrium
$4 $6 P2
Chapter 12 Slide 57
Nash Equilibrium in Prices
 Does the Stackelberg model prediction

for first mover hold when price is the
variable instead of quantity?
 Hint: Would you want to set price first?
Chapter 12 Slide 58
A Pricing Problem
for Procter & Gamble
 Scenario
1) Procter & Gamble, Kao Soap, Ltd.,

and Unilever, Ltd were entering the
market for Gypsy Moth Tape.
2) All three would be choosing their

prices at the same time.
Chapter 12 Slide 59
A Pricing Problem
 Scenario
3) Procter & Gamble had to

consider competitors prices
when setting their price.
4) FC = $480,000/month and
VC = $1/unit for all firms
Chapter 12 Slide 60
A Pricing Problem
 Scenario
5) P&G’s demand curve was:
Q = 3,375P-3.5(PU).25(PK).25
 Where P, PU , PK are P&G’s, Unilever’s,
and Kao’s prices respectively
Chapter 12 Slide 61
A Pricing Problem
 Problem
 What price should P&G choose and what is
the expected profit?
Chapter 12 Slide 62
P&G’s Profit (in thousands of $ per month)
P&G’s Competitor’s (Equal) Prices ($)

Price ($) 1.10 1.20 1.30 1.40 1.50 1.60 1.70 1.80
1.10 -226-215-204 -194-183-174 -165-155
1.20 -106-89 -73-58 -43-28 -15-2
1.30 -56-37 -192 1531 4762
1.40 -44-25 -612 2946 6278
1.50 -52-32 -153 2036 5268
1.60 -70-51 -34-18 -114 3044
1.70 -93-76 -59-44 -28-13 115
1.80 -118-102 -87-72 -57-44 -30-17
A Pricing Problem
 What Do You Think?

1) Why would each firm choose a
price of $1.40? Hint: Think
Nash Equilibrium
2) What is the profit maximizing price
with collusion?
Chapter 12 Slide 64
Competition Versus Collusion:
The Prisoners’ Dilemma
 Why wouldn’t each firm set the

collusion price independently and
earn the higher profits that occur
with explicit collusion?
Chapter 12 Slide 65
 Assume:
FC  $20 and VC  $0
Firm 1' s demand : Q  12  2 P1  P2
Firm 2' s demand : Q  12  2 P2  P1
Nash Equilibrium : P  $4   $12
Collusion : P  $6   $16
Chapter 12 Slide 66
 Possible Pricing Outcomes:

Firm 1 : P  $6 Firm 2 : P  $6   $16
P  $6 P  $4
 2  P2Q2  20
 (4)12  (2)(4)  6  20  $20
 1  P1Q1  20
 (6)12  (2)(6)  4  20  $4
Chapter 12 Slide 67
Payoff Matrix for Pricing Game
Firm 2
Charge $4 Charge $6
Charge $4 $12, $12 $20, $4
Firm 1
Charge $6 $4, $20 $16, $16
Chapter 12 Slide 68
 These two firms are playing a

noncooperative game.
 Each firm independently does the best it
can taking its competitor into account.
 Question
 Why will both firms both choose $4 when
$6 will yield higher profits?
Chapter 12 Slide 69
 An example in game theory, called the

Prisoners’ Dilemma, illustrates the
problem oligopolistic firms face.
Chapter 12 Slide 70
 Scenario
 Two prisoners have been accused of
collaborating in a crime.
 They are in separate jail cells and cannot
communicate.
 Each has been asked to confess to the
crime.
Chapter 12 Slide 71
Payoff Matrix for Prisoners’ Dilemma
Prisoner B
Confess Don’t confess
Confess
-5, -5 -1, -10
Prisoner A Would you choose to confess?
Don’t
confess -10, -1 -2, -2
Chapter 12 Slide 72
Payoff Matrix for
the P & G Prisoners’ Dilemma
 Conclusions: Oligipolistic Markets
1) Collusion will lead to greater profits
2) Explicit and implicit collusion is

possible
3) Once collusion exists, the profit

motive to break and lower price is
significant
Chapter 12 Slide 73
Payoff Matrix for the P&G Pricing
Problem
Unilever and Kao

Charge $1.40 Charge $1.50
Charge $12, $12 $29, $11

$1.40
P&G What price should P & G choose?
Charge
$1.50 $3, $21 $20, $20
Chapter 12 Slide 74
Implications of the Prisoners’
Dilemma for Oligipolistic Pricing
 Observations of Oligopoly Behavior
1) In some oligopoly markets, pricing

behavior in time can create a
predictable pricing
environment and implied collusion
may occur.
Chapter 12 Slide 75
Dilemma for Oligipolistic Pricing
 Observations of Oligopoly Behavior

2) In other oligopoly markets, the firms
are very aggressive and collusion is
not possible.
 Firms are reluctant to change price
because of the likely response of their
competitors.
 In this case prices tend to be relatively
rigid.
Chapter 12 Slide 76
The Kinked Demand Curve
If the producer raises price the
$/Q
competitors will not and the
demand will be elastic.
If the producer lowers price the

competitors will follow and the
demand will be inelastic.
Quantity
Chapter 12 MR Slide 77
The Kinked Demand Curve
$/Q So long as marginal cost is in the
vertical region of the marginal
revenue curve, price and output
will remain constant.
MC’
P* MC
Q* Quantity
Chapter 12 MR Slide 78
Dilemma for Oligopolistic Pricing
Price Signaling & Price Leadership
 Price Signaling
 Implicit collusion in which a firm announces
a price increase in the hope that other
firms will follow suit
Chapter 12 Slide 79
Price Signaling & Price Leadership
 Price Leadership
 Pattern of pricing in which one firm
regularly announces price changes that
other firms then match
Chapter 12 Slide 80
 The Dominant Firm Model

 In some oligopolistic markets, one large
firm has a major share of total sales, and a
group of smaller firms supplies the
remainder of the market.
 The large firm might then act as the
dominant firm, setting a price that
maximized its own profits.
Chapter 12 Slide 81
Price Setting by a Dominant Firm
Price D SF The dominant firm’s demand
curve is the difference between
market demand (D) and the supply
of the fringe firms (SF).
P1 MCD
P*
DD At this price, fringe firms

sell QF, so that total
P2 sales are QT.
QF QD QT MRD Quantity
Chapter 12 Slide 82
Cartels
 Characteristics
1) Explicit agreements to set output

and price
2) May not include all firms
Chapter 12 Slide 83
Cartels
 Characteristics
3) Most often international

 Examples of  Examples of
successful cartels unsuccessful cartels
 Copper
 OPEC
 Tin
 International
Bauxite  Coffee
Association  Tea
 Mercurio Europeo
 Cocoa
Chapter 12 Slide 84
Cartels
 Characteristics
4) Conditions for success

 Competitive alternative sufficiently
deters cheating
 Potential of monopoly power--inelastic
demand
Chapter 12 Slide 85
Cartels
 Comparing OPEC to CIPEC

 Most cartels involve a portion of the market
which then behaves as the dominant firm
Chapter 12 Slide 86
The OPEC Oil Cartel
Price TD SC
TD is the total world demand
curve for oil, and SC is the
competitive supply. OPEC’s
demand is the difference
between the two.
OPEC’s profits maximizing

quantity is found at the
P* intersection of its MR and
MC curves. At this quantity
OPEC charges price P*.
DOPEC
MCOPEC
MROPEC
QOPEC Quantity
Chapter 12 Slide 87
Cartels
 About OPEC
 Very low MC
 TD is inelastic
 Non-OPEC supply is inelastic
 DOPEC is relatively inelastic
Chapter 12 Slide 88
The OPEC Oil Cartel
Price TD SC
The price without the cartel:
•Competitive price (PC) where
DOPEC = MCOPEC
P*
DOPEC
Pc MCOPEC
MROPEC
QC QOPEC QT Quantity
Chapter 12 Slide 89
The CIPEC Copper Cartel
•TD and SC are relatively elastic
Price TD •DCIPEC is elastic
•CIPEC has little monopoly power
•P* is closer to PC
SC
MCCIPEC
P* DCIPEC
PC
MRCIPEC
QCIPEC QC QT Quantity
Chapter 12 Slide 90
Cartels
 Observations
 To be successful:
 Total demand must not be very price
elastic
 Either the cartel must control nearly all
of the world’s supply or the supply of
noncartel producers must not be price
elastic
Chapter 12 Slide 91
The Cartelization
of Intercollegiate Athletics
 Observations
1) Large number of firms (colleges)
2) Large number of consumers (fans)
3) Very high profits
Chapter 12 Slide 92
The Cartelization
of Intercollegiate Athletics
 Question
 How can we explain high profits in a
competitive market? (Hint: Think cartel and
the NCAA)
Chapter 12 Slide 93
The Milk Cartel
 1990s with less government support,

the price of milk fluctuated more widely
 In response, the government permitted
six New England states to form a milk
cartel (Northeast Interstate Dairy
Compact -- NIDC)
Chapter 12 Slide 94
The Milk Cartel
 1999 legislation allowed dairy farmers in

Northeastern states surrounding NIDC
to join NIDC, 7 in 16 Southern states to
form a new regional cartel.
 Soy milk may become more popular.
Chapter 12 Slide 95
Summary
 In a monopolistically competitive
market, firms compete by selling
differentiated products, which are highly
substitutable.
 In an oligopolistic market, only a few
firms account for most or all of
production.
Chapter 12 Slide 96
Summary
 In the Cournot model of oligopoly, firms

make their output decisions at the same
time, each taking the other’s output as
fixed.
 In the Stackelberg model, one firm sets
its output first.
Chapter 12 Slide 97
Summary
 The Nash equilibrium concept can also

be applied to markets in which firms
produce substitute goods and compete
by setting price.
 Firms would earn higher profits by
collusively agreeing to raise prices, but
the antitrust laws usually prohibit this.
Chapter 12 Slide 98
Summary
 The Prisoners’ Dilemma creates price

rigidity in oligopolistic markets.
 Price leadership is a form of implicit
collusion that sometimes gets around
the Prisoners Dilemma.
 In a cartel, producers explicitly collude
in setting prices and output levels.
Chapter 12 Slide 99
End of Chapter 12
Monopolistic
Competition and
Oligopoly

Chapter 12

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Chapter 12

 Implications of the Prisoners’ Dilemma

2) Free entry and exit

 The amount of monopoly power depends

 The Makings of Monopolistic Competition

$/Q Short Run $/Q Long Run

QSR Quantity QLR Quantity

Perfect Competition Monopolistic Competition

QC Quantity QMC Quantity

 Monopolistic Competition and Economic

 Monopolistic Competition and Economic

 The markets for soft drinks and coffee

Brand Elasticity of Demand

Colas: Royal Crown -2.4

 The barriers to entry are:

 The barriers to entry are:

 Equilibrium in an Oligopolistic Market

 Equilibrium in an Oligopolistic Market

 The Cournot Model

If Firm 1 thinks Firm 2 will produce

What is the output of Firm 1

 The Reaction Curve

Firm 2’s reaction curve shows how much it

In Cournot equilibrium, each

1) If the firms are not producing at the

2) When is it rational to assume that

 An Example of the Cournot Equilibrium

 An Example of the Cournot Equilibrium

Total Revenue, R1  PQ1  (30  Q )Q1

 An Example of the Cournot Equilibrium

 An Example of the Cournot Equilibrium

Competitive Equilibrium (P = MC; Profit = 0)

7.5 Firm 1’s

 Substituting Firm 2’s Reaction Curve

MR1  R1 Q1  15  Q1

 Competition in an oligopolistic industry

 How will consumers respond to a

 Why not charge a higher price to raise

 Price Competition with Differentiated

Firm 1 :  1  P1Q1  $20

 Determining Prices and Output

Firm 1’s Reaction Curve

 Does the Stackelberg model prediction

1) Procter & Gamble, Kao Soap, Ltd.,

2) All three would be choosing their

3) Procter & Gamble had to

P&G’s Competitor’s (Equal) Prices ($)

 What Do You Think?

 Why wouldn’t each firm set the

 Possible Pricing Outcomes:

Charge $4 $12, $12 $20, $4

Charge $6 $4, $20 $16, $16

 These two firms are playing a

 An example in game theory, called the

Prisoner A Would you choose to confess?

 Conclusions: Oligipolistic Markets

1) Collusion will lead to greater profits

2) Explicit and implicit collusion is

3) Once collusion exists, the profit

Unilever and Kao

Charge $12, $12 $29, $11

P&G What price should P & G choose?