BUS 525: Managerial EconomicsLecture 9Basic Oligopoly ModelsOverviewOverviewI. Conditions for Oligopoly?II. Role of Strategic InterdependenceIII. Profit Maxii!ation in "our Oligopoly Settings#Swee!y $%in&ed'(eand) Model#Cournot Model#Stac&el*erg Model #+ertrand ModelI,. Contesta*le Mar&ets9-2Oligopoly -nvironentOligopoly -nvironent. ar&et structure t/ere are only a few"irs0 eac/ of w/ic/ is large relative t/e totalindustry1 Relatively few firs0 usually less t/an 23.# (uopoly ' two firs# 4riopoly ' t/ree firs1 4/e products firs offer can *e eit/er differentiated or /oogeneous.1 "irs5 decisions ipact one anot/er.1 Many different strategic varia*les are odeled6# 7o single oligopoly odel.9-3Role of Strategic InteractionRole of Strategic Interaction1 8our actions affect t/e profits of your rivals.1 8our rivals5 actions affect your profits.1 9ow will rivals respond to your actions?9-4.n -xaple.n -xaple1 8ou and anot/er fir sell differentiated products.1 9ow does t/e :uantity deanded for your product c/ange w/en you c/ange your price?9-5PQD2 (Rival holds itsprice constant)P0PLD1 (Rival matches your price change)PHQ0QL2QL1QH1QH29-6+PQD1P0Q0D2 (Rival matches your price change)(Rival holds itsprice constant)D2Demand if Rivals atch Price Reductions !ut not Price "ncreases9-77ote t/at deand is ore inelastic w/en rivals atc/ a price c/ange t/an w/en t/ey do notReason6 "or a given price reduction0 a fir will sell ore if rivals do not cut t/eir prices (; t/an it will if t/ey lower t/eir prices (2%ey Insig/t%ey Insig/t1 4/e effect of a price reduction on t/e :uantity deanded of your product depends upon w/et/er your rivals respond *y cutting t/eir prices toot/in&s? rivals will stic& to t/eir current output # and t/ey do