NOTE_Lecture_14_-_oligopoly

NOTE_Lecture_14_-_oligopoly - 10/1/2009 Oligopoly...

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10/1/2009 1 Oligopoly Objectives Definition and characteristics of oligopoly markets Review of measures of market power Concentration ratios Herfindahl-Hirschman index Models of oligopoly behavior Open collusion (i.e., cartel) Tacit collusion Price leadership Cutthroat competition & the kinked demand curve Game theory Oligopoly: definition & characteristics An oligopoly is an industry with just a few sellers How few? So few that at least one firm is large enough to influence price, and the actions of one or a few firms will affect the other firms in the industry (IMPORTANT!! mutual interdependence) Identical or differentiated products Significant barriers to entry/exit exist
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10/1/2009 2 The crucial factor under oligopoly is the small number of firms Because there are so few firms, every competitor must think continually about the actions of its rivals – What each does could make or break the others Thus, there is a kind of interdependence among oligopolists Mutual interdependence of oligopoly firms When we talk about big business in the United States,oftentimes we’re talking about oligopolies. Some examples are: – Automobile industry: GM, Ford, Toyota, Honda, DaimlerChrysler, Nissan, etc. – We can also include all the other industrial giants that have become household names Oligopoly
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10/1/2009 3 Review: measures of market power Concentration ratio Herfindahl-Hirschman index Concentration ratio The 4-firm (or 8-firm) concentration ratio is the percentage share of industry sales of the four (or 8) leading firms in the industry – Industries with high concentration ratios are very oligopolistic Shortcomings of the concentration ratio Do not include imports Concentration ratios have become less meaningful as imports have increased Tell us nothing about the competitive structure of the industry Are all the firms relatively large or are they small Does not reveal possible coordination among firms in the industry Reflects national markets
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10/1/2009 4 Herfindahl-Hirschman Index (HHI) The HHI is the sum of the squares of the market shares of each firm in the industry HHI = ∑ (market share of ith firm) 2 Uses of HHI by Justice Dept: HHI > 1800, challenge merger/acquisition 1000 < HHI < 1800, If merger raises HHI by 100 pts or more, challenge HHI < 1800, industry is competitive The Competitive Spectrum The chart above shows the possible degrees of competition in an oligopolistic market. At one extreme is a cartel, and at the other extreme is where the oligopoly firms compete with one another. This competition can be explained by the kinked demand model of oligopoly behavior and game strategy. Cartels
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This note was uploaded on 05/22/2011 for the course ECON 1B taught by Professor Jamie during the Spring '06 term at West Valley.

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NOTE_Lecture_14_-_oligopoly - 10/1/2009 Oligopoly...

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