6 BSNS113 2019 S2 - Imperfect Competition - Oligopoly (1).pptx - Oligopoly Market Structure Oligopoly Market Structure Perfectly Competitive Market •

6 BSNS113 2019 S2 - Imperfect Competition - Oligopoly (1).pptx

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Oligopoly Market Structure
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Perfectly Competitive Market Less market power Price takers Goods are homogenous Free entry and exit Perfect Information Monopolistic Competition Many firms Free entry and exit Differentiated but highly substitutable product Oligopoly Small number of firms Product differentiation may or may not exist Barriers to entry Monopoly There is market power Single seller One product (limited or no good substitutes) Barriers to entry Oligopoly Market Structure
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Oligopoly Perfect competition In the long run: P = AR = MR = MC = AC AR = AC normal (zero economic) profits P = MC allocatively efficient Monopoly MR = MC gives profit maximixing output Q M At Q M AR > AC super normal (economic) profits P > MC allocatively inefficient Perfect Competition & Monopoly
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Oligopoly Oligopoly falls between perfect competition and monopoly. Firms in oligopoly are interdependent ie. interactions are strategic. Recall from BSNS104 Game Theory – study of how “agents” behave in strategic situations Oligopoly Small number of firms act strategically, such that profits do not depend only on their own production but also on the production of other firms Oligopolists are better of cooperating and behaving like a monopolist BUT Each firm is motivated by self-interest and cares about only it’s profit cooperation vs self-interest
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Oligopoly Total Supply (Q) Market Price (P) 1 $11 2 $10 3 $9 4 $8 5 $7 6 $6 7 $5 8 $4 9 $3 10 $2 Revenue TR = P x Q Total Cost TC = 2 Q Profit π= TR - TC $11 $2 $9 $20 $4 $16 $27 $6 $21 $32 $8 $24 $35 $10 $25 $36 $12 $24 $35 $14 $21 $32 $16 $16 $27 $18 $9 $20 $20 $0 Consider the following schedule : Monopoly outcome Profit is maximised at Q = 5 units P > MC Perfect Competition Outcome P = MC at Q = 10 Duopoly Example
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Oligopoly Total Supply (Q) Market Price (P) 1 $11 2 $10 3 $9 4 $8 5 $7 6 $6 7 $5 8 $4 9 $3 10
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