ECMC41-Lec6 - ECMC41 – Lecture 6 Strategic Behaviour 1...

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Unformatted text preview: ECMC41 – Lecture 6 Strategic Behaviour 1. Types of strategic behaviour Cooperative Non-cooperative 2. Non-cooperative strategies Predatory pricing Limit pricing Investment in R&D Raising rival ’ s costs 2 1. Types of Strategic Behaviour Strategic behaviour: a set of actions a firm takes to influence the market environment and its rivals’ expectations (and hopefully their behaviour - to your advantage or benefit) Types Cooperative : firms act collectively so as to increase the joint profits (e.g., cartel) Non-cooperative: each firm maximizes its own profit by improving its position in the market at the expense of its rival’s (by lowering their level of profit) 3 Cooperative Oligopolies: Cartels Questions Why do firms form cartels? What factors facilitate (hinder) the establishment and enforcement of a cartel? Why should the government intervene? 4 Figure: Cooperative oligopoly Cartel objective : collective gain n firms in the market (All participate each agrees to produce q m = Q m /n) $ $ c q m q * q m Q m p m p c p c p MC AC c Q 5 ∑ MC D Representative Firm Market MR MR (1) The ability to raise the market price thus the potential for monopoly profit (i.e. market power) Price elasticity of demand (inelastic – few subs) (2) Expected punishment from the authority (3) Costs of forming, maintaining and enforcing a cartel Contributing Factors- Successful establishment of a cartel 6 Contributing Factors- Enforcement of the agreement Ability to Detect cheating behaviour Punish cheating members Detection of cheating (depends on) (1) Number of firms (2) Market conditions: stability and other factors (3) Availability of information (4) Firm’s size: vertical boundaries 7 (1) Fix more than price: buyers, areas, market shares (2) Through some sales contracts Most-favoured-customer clause Meeting-competition clause (3) Use “trigger price strategy” Trade off between the SR gains and LR losses Techniques used to prevent cheating 8 (1). Dominant firm price-leader: OPEC: Saudi Arabia (leader) Domestic gas retailing (Imperial oil – leader) (2). Collusive price leadership (secret formal & tacit collusion) – ex. US Steel: “Gary’s Dinner” (3). Trade associations(3)....
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This note was uploaded on 11/09/2010 for the course ECM ECMC41 taught by Professor Jackparkinson during the Spring '10 term at University of Toronto.

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ECMC41-Lec6 - ECMC41 – Lecture 6 Strategic Behaviour 1...

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