Essentials of Economics, 3rd ed

1
Oligopoly
2
Oligopoly

• Two examples of oligopoly

3
Market shares of the largest brewers
4
Market shares of the largest brewers
5
Oil prices
Impending war with Iraq
Iraq invades Iran
OPECs first quotas
Iraq invades Kuwait
Revolution in Iran
World-wide recovery
First oil from North Sea
World-wide slowdown
Cease-fire in Iran-Iraq war
New OPEC quotas
Recession in Far East
Yom Kippur War Arab oil embargo
6
Oil prices
Impending war with Iraq
Iraq invades Iran
OPECs first quotas
Iraq invades Kuwait
Revolution in Iran
World-wide recovery
First oil from North Sea
World-wide slowdown
Cease-fire in Iran-Iraq war
New OPEC quotas
Recession in Far East
Yom Kippur War Arab oil embargo
7
Oligopoly

• A profit-maximising cartel

8
Profit-maximising cartel

O
Q
9
Profit-maximising cartel

Industry D AR
Industry MR
O
Q
10
Oligopoly

• Price leadership
• (assumption of fixed market share)

11
Price leader aiming to maximise profits for a
given market share

O
Q
12
Price leader aiming to maximise profits for a
given market share

MC
AR D market
AR D leader
MR leader
O
Q
13
Oligopoly

• Game theory

14
Profits for firms A and B at different prices
Xs price
2.00
1.80
A
B
5m for Y 12m for X
2.00
10m each
Ys price
D
C
12m for Y 5m for X
1.80
8m each
15
The prisoners' dilemma
Amanda's alternatives
Not confess
Confess
A
B
Nigel gets 10 years Amanda gets 3 months
Not confess
Each gets 1 year
Nigel's alternatives
D
C
Nigel gets 3 months Amanda gets 10 years
Each gets 3 years
Confess
16
Oligopoly

• A decision tree

17
A decision tree
Boeing decides
A
18
Oligopoly

• Kinked demand curve theory

19
Kinked demand for a firm under oligopoly

Current price and quantity give one point on
demand curve
Q
O
20
Kinked demand for a firm under oligopoly

D
P1
D
Q
O
Q1
21
Stable price under conditions of a kinked demand
curve

P1
D AR
Q
O
Q1