Oligopoly Pricing and Output

1
Oligopoly Pricing and Output

• Various models
• Common thread--interdependence assumption--how
  will competitors react to price and output
  changes
• At least 2 firms--at least 1 with a significant
  market share
• Pure or differentiated

2
Models of Oligopoly

• Cournot model
• Kinked demand curve
• Cartel model--collusion
• Price leadership-barometric or dominant firm

3
Cournot Model (1838)

• Simple duopoly
• Each firm is a profit maximizer
• Each firm assumes that regardless of own output,
  other firms output will not change
• A observes B producing QB and assumes that
  regardless of QA, ?QB 0
• Mathematical example

4
Kinked Demand Curve

• Sweezy Model (1939)
• Price cuts will be followed to protect market
  share
• Price increases will not be followed
• Demand curve is more elastic for price increases
  than price decreases, thus a kink in the demand
  curve and a gap in MR
• Graphical model

5
Cartel Model

• Model of collusion e.g.., OPEC, NCAA
• Set price and output like a monopolist
• Methods of allocating production
• Based on past sales, production capacity,
  regional distribution, or behave like a
  multi-plant monopolist
• Ease of formation
• Few firms, similar product, similar costs
• Mathematical example

6
Price Leadership

• One firm is price leader--price searcher
• Other firms follow--price takers (P MRF)
• Followers produce all they want at set price
• Leader produces to satisfy market demand
• QL QT - QF
• Mathematical example