Oligopoly 102-107 Flashcards
Oligolopoly compared to perfect monop
+Barriers
-Fewer firms
Key diff!! Oligopolistic firms are are interdependent; price change by one firm is met w/ a price change by another firm; D curve (represents P) for a product is directly effected interdependently
Oligopoly assumptions (in order to understand how a P change by one firm in olig. effects D curve of others)
Four models (assumptions)
Kinked Demand Curve
Cournot Duopoly
Nash Equil (prisoners dilemma)
Stackelberg Dominant Firm Model
Kinked Demand curve (assumes a firm +P, then others -P)
The ‘kink’
A P2 > P1 is less elastic than P1>P0
Less elastic means a higher price but over a limited Q
So if a firm +P, others will instead take adv. of +Q, but -P, eliminating market share from higher P firm
Kink disadv: Does not determine market P
Cournout Duopoly Model (Qs depends on the actions, reactions of other firms; strategic games)
Duopoly, same MC’s of prod.
Either firm uses last quarter Qs, so they change Qs next period until they’re equal which results in a market P less than monopoly but more than MC (perfect comp)
remember that! Perfect comp P is < Monop > MC
Nash Equilibrium
Choices take place until no other firm can +econ profits or decrease losses
Prisoners Dilema: Nash Equil for Oligopoly is for both firms to cheat on a ‘collusion’ agreement by charging lowerP, but best outcome is for both to honor the agreement.
Collusion; contract to increase price: successfull if fewer firms, similar products, cost structures, small and frequent purchases
Dominant Firm Model
Dominant firm (greater scale, lower cost structure = larger market share)
Dominant firm produces a Q much > than competitive firms
If comp. firms -P, dominant firm will -P and firms will exit because they can’t cover MC which free’s up market share, esp. to dominant firm
Imp. Olig. Point
Firms decisions are interdependent so that the expected reaction of other firms is an important consideration.
Resulting price - Below Monop P, above perfect comp P (so above MC)
Collusion vs. perfect comp
Qs competition;D=MC > Qs collusion;MC=MR, but P collusion; D=MC=MR > P competition; MC = D