Chapter 7.2 Oligopoly & Cartels Chapter 7.2 Oligopoly & Cartels.
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Transcript of Chapter 7.2 Oligopoly & Cartels Chapter 7.2 Oligopoly & Cartels.
Chapter 7.2Oligopoly & CartelsChapter 7.2Oligopoly & Cartels
OLIGOPOLYOLIGOPOLY
• We have looked at non-cooperative
oligopolies; but noted their incentive to
collude. Here we want to look at various
possible collusion scenarios.
• Tacit collusion
– price leadership: dominant firm
• We have looked at non-cooperative
oligopolies; but noted their incentive to
collude. Here we want to look at various
possible collusion scenarios.
• Tacit collusion
– price leadership: dominant firm
£
QO
Dmarket
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
Leader assumes everyone else will act
like a perfectly competitive firm once it sets price, by choosing output such that P=MC
£
QO
Dmarket
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
So Supply curve for everybody else is just
their MC curve
And the leader takes this MC/supply curve as
given
£
QO
Sall other firms
Dmarket
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
What is left over for the
market leader at each price ?
£
QO
Sall other firms
Dmarket
P1
P2
b
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
Above P1 it gets nothing, below P2 no competitors
£
QO
Sall other firms
DmarketDleader
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
Above P1 it gets nothing, below P2 no competitorsPOF
£
QO
Sall other firms
DmarketDleader
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
What about at prices between
P1 and P2?
What if the price is POF ?
POF
QOF
£
QO
Sall other firms
DmarketDleader
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
The “leftovers” represent
demand curve for the leading
firm
POF
£
QO
Sall other firms
DmarketDleader
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
The leader (of course!)
maximises its profit subject to
its demand curve
£
QO
Sall other firms
Dmarket
P1
P2
a
b
Division of the market between leader and followersDivision of the market between leader and followers
Dominant firm price leadershipDominant firm price leadership
To find optimal P and Q we
consider, as usual, the MR,
MC and AC curves.
£
QO
Sall other firms
Dmarket
Dleader
PL
Determination of price and outputDetermination of price and output
MRleader
MCleader
QL
l
Dominant firm price leadershipDominant firm price leadership
£
QO
Sall other firms
Dmarket
Dleader
PL
MRleader
MCleader
QLQT
tl
Determination of price and outputDetermination of price and output
Dominant firm price leadershipDominant firm price leadership
£
QO
Sall other firms
Dmarket
Dleader
PL
MRleader
MCleader
QL QFQT
f tl
Determination of price and outputDetermination of price and output
Dominant firm price leadershipDominant firm price leadership
Remember followers are a large group of smaller firms
And QT=QL+QF
£
Q O
AR D market
Alternative Leadership: Price leader aiming to Alternative Leadership: Price leader aiming to maximise profits for a given market sharemaximise profits for a given market share
£
Q O
AR D leader
=40% of Market
AR D market
Assume constantmarket share
for leader
Price leader aiming to maximise profitsPrice leader aiming to maximise profitsfor a given market sharefor a given market share
£
Q O
MR leader
AR D leader
AR D market
Price leader aiming to maximise profitsPrice leader aiming to maximise profitsfor a given market sharefor a given market share
£
Q O
MC
MR leader
AR D leader
AR D market
Price leader aiming to maximise profitsPrice leader aiming to maximise profitsfor a given market sharefor a given market share
£
Q O
PL
MC
MR leader
AR D leader
QL
l
AR D market
Price leader aiming to maximise profitsPrice leader aiming to maximise profitsfor a given market sharefor a given market share
£
Q O
AR D market PL
MC
QT
MR leader
AR D leader
QL
l t
Price leader aiming to maximise profitsPrice leader aiming to maximise profitsfor a given market sharefor a given market share
Remainder QT-QL divided up
amongst other producers
OLIGOPOLYOLIGOPOLY
• Tacit collusion
– price leadership: dominant firm
– price leadership: barometric
See Sloman. Just like the case where a
leading firm has a constant market share. One
firm chooses price given D, MR & MC, others
follow.
• Tacit collusion
– price leadership: dominant firm
– price leadership: barometric
See Sloman. Just like the case where a
leading firm has a constant market share. One
firm chooses price given D, MR & MC, others
follow.
OLIGOPOLYOLIGOPOLY
– rules of thumb
AC mark-up pricing P=(1+.10)AC (firms
somehow “agree” on a certain rate of profits).
Benchmark Pricing £9.99, £14,99, £19.99
– rules of thumb
AC mark-up pricing P=(1+.10)AC (firms
somehow “agree” on a certain rate of profits).
Benchmark Pricing £9.99, £14,99, £19.99
• Tacit collusion• Tacit collusion
OLIGOPOLYOLIGOPOLY
• Collusion and the law
– It may be difficult to prove that firms collude,
especially if collusion is tacit.
– What is the difference between all firms
agreeing a price and a price which is
competitively set? Well, it is up to the right
authorities to figure this out – typically they
cannot prove anything unless it is REALLY bad.
• Collusion and the law
– It may be difficult to prove that firms collude,
especially if collusion is tacit.
– What is the difference between all firms
agreeing a price and a price which is
competitively set? Well, it is up to the right
authorities to figure this out – typically they
cannot prove anything unless it is REALLY bad.
SUMMARYSUMMARY
We have looked at various types of imperfect We have looked at various types of imperfect competition.competition.
Lack of competition is, as a general rule, bad Lack of competition is, as a general rule, bad for consumers. Against this speaks that for consumers. Against this speaks that monopolies in some cases tend to innovate monopolies in some cases tend to innovate more - though this is disputed.more - though this is disputed.
The law typically forbids monopolistic The law typically forbids monopolistic behavior, especially collusion, but it is not behavior, especially collusion, but it is not an easy matter to prove anyone’s guilt.an easy matter to prove anyone’s guilt.
The remaining material in this The remaining material in this presentation was not used in lectures presentation was not used in lectures though it is relevant for the classwork though it is relevant for the classwork for weeks 9 & 10. Thus part of these for weeks 9 & 10. Thus part of these assignments will consist in reading assignments will consist in reading
section 7.3 of Sloman. You will not be section 7.3 of Sloman. You will not be asked question about this material at asked question about this material at
the exam, however.the exam, however.
OLIGOPOLYOLIGOPOLY
• Non-collusive oligopoly: the kinked demand curve theory– assumptions of the model
If you drop price everyone will followIf you raise price you are on your own
• Non-collusive oligopoly: the kinked demand curve theory– assumptions of the model
If you drop price everyone will followIf you raise price you are on your own
Suppose initially we have traditional diagram for firmSuppose initially we have traditional diagram for firm
£
QO
P1
Q1
D MR
MC
But once equilibrium is established, if you raise price nobody follows you, and
if you lower it everybody does
and below Q1 it is steeper
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
D
So above Q1 Demand curve is now flatter
MC
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
D
Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly
£
QO
P1
Q1
D
So now firm faces the following demand curve
£
QO
P1
Q1
D ARa
MR
MR for the top part of the curve
£
QO
P1
Q1
MR
a
bD AR
MR for the lower part of the curve?
£
QO
P1
Q1
MR
a
bD AR
Kinked Demand Curve Theory
• Why is this model important ?
• Because it helps to explain why we tend to observe relatively stable prices in oligopolistic industries
• Why is this model important ?
• Because it helps to explain why we tend to observe relatively stable prices in oligopolistic industries
£
QO
P1
Q1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
To see this lets draw in the original
D, MR and MC curve here.
£
QO
P1
Q1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
To see this let’s draw in the original
D, MR and MC curve here.
£
QO
P1
Q1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
To see this lets draw in the original
D, MR and MC curve here.
Notice the original MC lies between
points a and b
£
QO
P1
Q1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
MC1
MC2
But what if MC changes?
£
QO
P1
Q1
MR
a
bD AR
Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve
MC1
MC2
So MC can vary a lot and price won’t change
OLIGOPOLYOLIGOPOLY
• Non-collusive oligopoly: the kinked demand curve theory
• Offers a reason for stable prices besides collusion
• But other reasons why prices may be stable
• Prices may be costly to change
• Menu costs
• Non-collusive oligopoly: the kinked demand curve theory
• Offers a reason for stable prices besides collusion
• But other reasons why prices may be stable
• Prices may be costly to change
• Menu costs
OLIGOPOLYOLIGOPOLY
• Oligopoly and the public interest
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets
• Oligopoly and the public interest
– advantages
– disadvantages
– difficulties in drawing general conclusions
• Advertising and the public interest
• Oligopoly and contestable markets
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
O
P1
D
200
P
Q
First-degree price discriminationFirst-degree price discrimination
O
P1
D
200
P
Q
First-degree price discriminationFirst-degree price discrimination
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
Third-degree price discriminationThird-degree price discrimination
P
QO
P1
D
200
O
P1
D
P2
150 200
P
Q
Third-degree price discriminationThird-degree price discrimination
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Conditions necessary for price discrimination to operate
• Meaning of price discrimination
• Types of price discrimination
– first degree
– second degree
– third degree
• Conditions necessary for price discrimination to operate
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
MRX
(a) Market X
O O O
DX
DY
MRX
MRY
(a) Market X (b) Market Y
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
5
3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
5
1000 3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
5
1000 2000 3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
5
9
1000 2000 3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
O O O
DX
DY
MRX
MRY MRT
MC
5
97
1000 2000 3000
(a) Market X (b) Market Y (c) Total
(markets X + Y)
Profit-maximising output underProfit-maximising output underthird-degree price discriminationthird-degree price discrimination
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
PRICE DISCRIMINATIONPRICE DISCRIMINATION
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
– disadvantages
• Profit-maximising prices and output under price discrimination
– first degree
– third degree
• Advantages to the firm
• Price discrimination and the public interest
– advantages
– disadvantages