Oligopoly

1
Oligopoly

• Characteristics of Oligopoly
• Models of Oligopoly

2
Market Characteristics
Pure Competition
Market Characteristics
Monopolistic Competition
Oligopoly
Monopoly
suppliers Type of goods/service Entry/Exit Mk
t Power Profit
Many Standardized Easy None Normal
Many Differentiated Easy Little Normal
Few Dominate S or D Difficult Large Above
Normal
One Differentiated Impossible Absolute Above
Normal
3
Characteristics of Oligopoly

• Oligopolies are made up of a small number of
  firms that take into account the expected
  reaction of other firms.

4
Characteristics of Oligopoly

• The product can be standardized or unique.
• Crude Oil
• Corvette

5
Characteristics of Oligopoly

• Entry and exit from the market is difficult due
  to barriers
• legal barrier
• natural barrier
• sociological barrier

6
Characteristics of Oligopoly

• Profit can be above normal due to the difficulty
  new firms have competing with existing firms.

7
Oligopoly

• Characteristics of Oligopoly
• Models of Oligopoly

8
Models of Oligopoly

• Models of Oligopoly Behavior
• The cartel model
• The contestable market model

9
Models of Oligopoly

• The Cartel Model
• A cartel (sometimes called a trust) is a
  combination of firms that acts as it were a
  single firm.
• A cartel is a shared monopoly.
• Formal collusion is illegal while informal
  collusion is permitted.

10
Models of Oligopoly

• The Cartel Model
• Sometimes the largest or most dominant firm takes
  the lead in setting prices and the others follow.

11
Models of Oligopoly

• The Contestable Market Model
• Barriers to entry and to exit determine a firms
  price and output decisions.

12
Models of Oligopoly

• The Contestable Market
• Even if the industry contains only one firm, it
  could still be a competitive market if entry is
  open.

13
Models of Oligopoly

• Comparison of the Two Models
• In the cartel model the oligopoly sets a monopoly
  price.
• In the contestable market model with no barriers
  to entry, firms employ competitive pricing.

14
Models of Oligopoly

• Strategic Pricing and Oligopoly
• Both the cartel and contestable market models use
  strategic pricing decisionsthey set their prices
  based on the expected reactions of other firms.

15
Models of Oligopoly

• Price Wars
• Price wars are the result of strategic pricing
  decisions gone wild.
• Attempts to drive out the competition

16
Game Theory Strategic Decision Making

• The Prisoners Dilemma

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The Prisoners Dilemma Payoff Matrix
A does not confess
A confesses
B does not confess
B confesses
18
The Prisoners Dilemma Payoff Matrix
Amazon.Com
A No Free Shipping
B Free Shipping
1,000
2,000
A No Free Shipping
1,000
- 300
Buy.Com
200
B Free Shipping
- 300
200
2,000