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

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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 rivals (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) Firms 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: Garys Dinner (3). Trade associations(3)....
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ECMC41-Lec6 - ECMC41 Lecture 6 Strategic Behaviour 1. Types...

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