L20 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of  Microeconomics Professor Jo Hertel Lecture 21: Oligopoly Definitions Strategic price and quantity setting Oligopolies and antitrust Other strategies in oligopoly: Strategic advertising, strategic entry deterrence Note: The ‘kinked demand model’ from the book is not required.
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2 Oligopoly An oligopoly is an industry with only a small number of producers. It is a common market structure. Cigarettes, batteries, breweries, breakfast cereals, cars, superstores, and airlines, among others. It arises from the same forces that lead to monopoly, but in weaker form. Oligopolists are not monopolists, but because they are few, they need not take anyone else’s prices (quantities, strategies...) as given: oligopolists tend to behave strategically. Oligopolists’ actions influence profits of the others
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3 Oligopolistic industries in the US Some of the most concentrated industries: Industry Market share of 4 largest firms Record production/distribution 81% Cable & subscription TV 63.9% Cellular carriers 63.4% Chocolate products manufacture 79.5% Breweries 89.7% Book stores 78.2% Radio/TV/electronics stores 68.9%
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4 Understanding oligopoly (1) A monopolist does not want to change q when he produces the monopolistic quantity B A 0 2 4 6 8 10 0 2 4 6 8 10 p D MR MC B = quantity effect on profit of q=1 A = price effect on profit of q=1 p m For the monopolist setting q m , A < B and A ≈ B! The monopolist does not want to increase quantity q m =3.5
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5 Understanding oligopoly (2) Here, two firms collude to produce ½ q m each: is this optimal for them? B = quantity effect on profit of q=1 A = price effect on profit of q=1 B A 0 4 6 8 10 0 2 4 6 8 10 p D MR MC p m ½ q m The oligopolist who increases his quantity has the same quantity effect as the monopolist but dumps half the (negative) price effect on the other firm!
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6 Understanding oligopoly (2) Formal models of oligopoly are difficult. Strategic interactions include a vast range of different possibilities, so there isn’t a single “workhorse” model of oligopoly.
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