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Oligopoly

Oligopoly. OLIGOPOLY. Key features of oligopoly barriers to entry interdependence of firms incentives to compete. OLIGOPOLY. Non-collusive oligopoly: game theory. Profits for firms A and B at different prices. X’s price. £2.00. £1.80. B. A. £5m for Y £12m for X. £2.00. £10m each.

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Oligopoly

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  1. Oligopoly

  2. OLIGOPOLY • Key features of oligopoly • barriers to entry • interdependence of firms • incentives to compete

  3. OLIGOPOLY • Non-collusive oligopoly: game theory

  4. Profits for firms A and B at different prices X’s price £2.00 £1.80 B A £5m for Y £12m for X £2.00 £10m each Y’s price D C £12m for Y £5m for X £1.80 £8m each

  5. OLIGOPOLY • Non-collusive oligopoly: game theory • simple dominant strategy games

  6. Profits for firms A and B at different prices X’s price £2.00 £1.80 B A £5m for Y £12m for X £2.00 £10m each Y’s price D C £12m for Y £5m for X £1.80 £8m each

  7. OLIGOPOLY • Non-collusive oligopoly: game theory • alternative strategies: maximax and maximin • simple dominant strategy games • the prisoners’ dilemma

  8. The prisoners' dilemma Amanda's alternatives Not confess Confess B A Nigel gets 10 years Amanda gets 3 months Not confess Each gets 1 year Nigel's alternatives D C Nigel gets 3 months Amanda gets 10 years Each gets 3 years Confess

  9. OLIGOPOLY • Non-collusive oligopoly: game theory -simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium

  10. A decision tree Boeing –£10m Airbus –£10m (1) 500 seater Airbus decides B1 400 seater Boeing +£30m Airbus +£50m (2) 500 seater Boeing +£50m Airbus +£30m (3) 400 seater 500 seater B2 400 seater Airbus decides Boeing –£10m Airbus –£10m (4) Boeing decides A

  11. OLIGOPOLY • Non-collusive oligopoly: assumptions about rivals’ behaviour • The Cournot model of duopoly • assumption that rival will produce a given quantity

  12. MCA DM DA1 QB1 The Cournot model of duopoly £ Firm A believes that firm B will produce QB1. O Quantity (a) Firm A’s profit-maximising position

  13. OLIGOPOLY • Non-collusive oligopoly: assumptions about rivals’ behaviour • The Cournot model of duopoly • assumption that rival will produce a given quantity • profit-maximising price and output for firm A

  14. PA1 MRA1 QA1 The Cournot model of duopoly £ MCA Firm A’s profit-maximising output and price are QA1 and PA. DM DA1 O QB1 Quantity (a) Firm A’s profit-maximising position

  15. OLIGOPOLY • Non-collusive oligopoly: assumptions about rivals’ behaviour • The Cournot model of duopoly • assumption that rival will produce a given quantity • profit-maximising price and output for firm A • reaction functions of firms A and B

  16. Firm A’s reaction function for each assumed output of B RA Firm B’s reaction function for each assumed output of A x QB1 RB QA1 The Cournot model of duopoly £ MCA Firm B’s output PA1 DM DA1 MRA1 O QA1 O QB1 Firm A’s output Quantity (b) The two firms’ reaction functions (a) Firm A’s profit-maximising position

  17. OLIGOPOLY • Non-collusive oligopoly: assumptions about rivals’ behaviour • The Cournot model of duopoly • assumption that rival will produce a given quantity • profit-maximising price and output for firm A • reaction functions of firms A and B • Cournot equilibrium

  18. e QBe RB QAe The Cournot model of duopoly Equilibrium at point e, where the two reaction functions cross £ RA MCA Firm B’s output PA1 x QB1 DM DA1 MRA1 QA1 O QA1 O QB1 Firm A’s output Quantity (b) The two firms’ reaction functions (a) Firm A’s profit-maximising position

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