Chapter 9 - Oligoploy.ppt;.;;;;;;;;;;;;;;

/z x

1. Chapter 9
Market Structure: Oligoploy

2. Examples of Oligopolistic
Industries
Airlines
Soft Drinks
Doughnuts
Parcel and Express Delivery
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
2

3. Oligopoly Models
Noncooperative oligopoly
models are models of
interdependent oligopoly
behavior that assume that
firms pursue profit-
maximizing strategies
based on assumptions
about rivals’ behavior and
the impact of this behavior
on the given firm’s
strategies.
Cooperative oligopoly
models are models of
interdependent oligopoly
behavior that assume that
firms explicitly or implicitly
cooperate with each other
to achieve outcomes that
benefit all the firms.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
3

4. Noncooperative Oligopoly Models
The Kinked Demand Curve Model
Game Theory Models
Strategic Entry Deterrence
Predatory Pricing
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
4

5. Kinked Demand Curve
The kinked demand curve
model of oligopoly
incorporates assumptions
about interdependent
behavior and illustrates
why oligopoly prices may
not change in reaction to
either demand or cost
changes.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
5
MC
$
Q
D
2: Rivals don’t
follow
D
1: Rivals do follow
MR
1
MR
2
P
1
Q
1

6. Game Theory Models
A set of mathematical tools for analyzing
situations in which players make various
strategic moves and have different outcomes
or payoffs associated with those moves.
Types of games
–zero-sum or non-zero-sum
–cooperative or non-cooperative
–two-person or n-person
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
6

7. Dominant Strategies and the
Prisoner’s Dilemma
This payoff matrix shows
the various prison terms
for Bonnie and Clyde
that would result from
the combination of
strategies chosen when
questioned about a
crime spree.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
7

8. Zero-Sum Game
What is a Zero-Sum
Game?
Zero-sum is a situation
in
 
game theory 
in which
one person’s gain is
equivalent to another’s
loss, so the net change
in wealth or benefit is
zero. A zero-sum game
may have as few as two
players, or millions of
participants.
Zero-sum games are found in
game theory, but are less common
than non-zero sum games. Poker
and gambling are popular
examples of zero-sum games
since the sum of the amounts won
by some players equals the
combined losses of the others.
Games like chess and tennis,
where there is one winner and one
loser, are also zero-sum games. In
the financial markets, options and
futures are examples of zero-sum
games, excluding transaction
costs. For every person who gains
on a contract, there is a counter-
party who loses.
8

9. Non-Zero Sum Game
What is a Non Zero Sum Game?
A non zero sum game is a situation where there is
a net benefit or net loss to the system based
on out the outcome of the game.
An example of what should not be considered a
non zero sum game is a contest between a
trade ship and a pirate ship, although it may
look like
one at first glance. Here, a victory for the pirates
would mean gain of wealth, resources, and
men (probably as prisoners),
whereas a win for the trade ship would only mean
a defeat of the challenge by the pirates. Here,
the prize and losses being different for both
the contesting parties do not qualify it as an
example of a non zero sum game.
Another example could be in financial markets,
where competing firms collaborate to expand
the overall size of their market. Creating an
industry-wide organization would increase
confidence in the industry and result in more
profit for all competitors.
Non zero sum games don’t have to create a net
positive result, it could also be negative as
well.
  In the pirate example above, there is a
case where the pirates win and it’s a net
negative for the whole system.
Typical Example
The Battle of the Sexes is a simple
example of a typical non-zero-sum
game. In this example a man and his
wife want to go out for the evening.
They have decided to go either to a
ballet or to a boxing match. Both
prefer to go together rather than
going alone. While the man prefers
to go to the boxing match, he would
prefer to go with his wife to the ballet
rather than go to the fight alone.
Similarly, the wife would prefer to go
to the ballet, but she too would rather
go to the fight with her husband than
go to the ballet alone. The matrix
representing the game is given
below:
9

10. The wife's payoff matrix is represented by the first element of the
ordered pair while the husband's payoff matrix is represented by the
second of the ordered pair.
From the matrix above, it can be seen that the situation represents a
non-zero-sum, non-strictly competitive conflict. The common interest
between the husband and wife is that they would both prefer to be
together than to go to the events separately. However, the opposing
interests is that the wife prefers to go to the ballet while her husband
prefers to go to the boxing match.10
Husband
Wife
  Boxing Match Ballet
Boxing Match 2, 3 1, 1
Ballet 1, 1 3, 2

11. Prisoner’s Dilemma – Dominant
Strategy
A dominant strategy
is one that results in
the best outcome or
highest payoff to a
given player no
matter what action or
choice the other
player makes.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
11

12. Nash Equilibrium
Nash equilibrium is a
set of strategies from
which all players are
choosing their best
strategy, given the
actions of the other
players.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
12

13. Strategic Entry Deterrence
Limit pricing is a
policy of charging a
price lower than the
profit-maximizing
price to keep other
firms from entering
the market.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
13
$
Q
D
MR
MC
ATC
P
πmax
Q
πmax
P
LP
=
ATC
EN
Q
LP

14. Predatory Pricing
Pedatory pricing:
–Japanese share of market
QP - QUS = NM = RG
–Loss per unit to Japanese
firms PC - PP = NR
–Total loss to Japanese
firms NRGM
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
14
$
Q
P
US
P
J
P
C
P
P
Q
US
Q
c
Q
J
Q
P
K
L
JG
M
N
E
RS
T

15. Cooperative Oligopoly Models
Cartels
Tacit Collusion
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
15

16. Cartels - Examples
OPEC
Diamond Cartel
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
16

17. Cartel Behavior
A cartel is an organization of firms that agree to
coordinate their behavior regarding pricing and
output decisions in order to maximize the joint
profits for the organization.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
17

18. Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
18
Model of Joint Profit Maximization
MC
2
D
MC
1
$ $$
Q Q Q
MC
2
MC
c
MC
cMC
1
P
C
MR
Q
CQ
2*Q
1*
Firm 1 Firm 2 Cartel

19. Success in Cartels
A cartel is likely to be the most successful
when:
–It can raise the market price without inducing
significant competition from noncartel members.
–The expected punishment for forming the cartel is
low relative to the expected gains.
–The costs of establishing and enforcing the
agreement are low relative to the gains.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
19

20. Tacit Collusion
Because cartels are illegal in the United States
due to the antitrust laws, firms may engage in
tacit collusion, coordinated behavior that is
achieved without a formal agreement.
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
20

21. Practices that facilitate tacit
collusion
Uniform prices
A penalty for price discounts
Advance notice of price changes
Information exchanges
Swaps and exchanges
Copyright © 2010 Pearson Education, Inc.
Publishing as Prentice Hall
21