Lecture16 - Lecture #16 Oligopoly The term oligopoly covers...

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Oligopoly Lecture #16 The term oligopoly covers a variety of market structures and market behaviours. As a result, there does not exist a definitive model of oligopoly. However, the following assumptions capture the essential elements of this market structure. ASSUMPTION #1 : There are few sellers of the product. In some cases, all of these “few” sellers are large firms (like in car manufacturing). However, more often there are a couple of large firms and some small firms in the industry (like in the brewing industry). One of the most studied special cases is that of a single, large, low-cost “dominant firm” that acts as a leader to the group of follower firms (Stackelberg leadership model). ASSUMPTION #2 : There are significant barriers to entry into the industry. The presence of these significant barriers to entry accounts for the small number of firms in oligopolistic industries. Entry prevention is often made possible by the cost advantages realized by the existing firms. First, let’s consider the case of a well established firm that has lower costs per unit (ATC) than potential entrants. By charging a price such as P 1 the established firm would more than cover its own costs while preventing potential entrants from operating at even normal profits (see graph on next slide). This sort of barrier to entry is difficult to continue in the long-run unless the existing firms have considerable monopoly-like power over resources and/or technology.
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C,P MC ATC (potential entrants) Sometimes the presence of P 0 P 1 ATC (existing firms) Sometimes the presence of large economies of scale provides a major barrier to entry even if the existing firms do not actively engage X D MR firms do not actively engage in entry preventing behavior. X 0 C C LRAC (with advertising) LRAC X Car Manufacturing d f X d f LRAC Toothpaste Manufacturing Large Economies of Scale Small Economies of Scale It takes a large market share (df Technology is so simple by It takes a large market share (df) Technology is so simple by to attain an output level at which comparison that most reductions in costs per unit are low enough to costs per unit can be realized with compete with existing firms. a small market share. (Large Scale Barriers to Entry). (Weak Scale Barriers to Entry).
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Obviously, it takes relatively little investment and knowledge to enter the toothpaste industry than it does to enter the auto industry. For this reason, existing firms in such industries often protect themselves against entry by artificially raising costs. Heavy advertising, for example, effectively raises the LRAC curve. Another way to discourage entry is for the existing firm to create many different brands of toothpaste that cater to different tastes of consumers, hence making it difficult for new entrants to get into niche markets without considerable expense.
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This note was uploaded on 03/28/2010 for the course ECON 301 taught by Professor Coreyvandewaal during the Winter '09 term at Waterloo.

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Lecture16 - Lecture #16 Oligopoly The term oligopoly covers...

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