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Oligopoly Pricing and Output

Oligopoly Pricing and Output. Various models Common thread--interdependence assumption--how will competitors react to price and output changes At least 2 firms--at least 1 with a significant market share Pure or differentiated. Models of Oligopoly. Cournot model Kinked demand curve

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Oligopoly Pricing and Output

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  1. Oligopoly Pricing and Output • Various models • Common thread--interdependence assumption--how will competitors react to price and output changes • At least 2 firms--at least 1 with a significant market share • Pure or differentiated

  2. Models of Oligopoly • Cournot model • Kinked demand curve • Cartel model--collusion • Price leadership-barometric or dominant firm

  3. Cournot Model (1838) • Simple duopoly • Each firm is a profit maximizer • Each firm assumes that regardless of own output, other firm’s output will not change • A observes B producing QB and assumes that regardless of QA, QB = 0 • Mathematical example

  4. Kinked Demand Curve • Sweezy Model (1939) • Price cuts will be followed to protect market share • Price increases will not be followed • Demand curve is more elastic for price increases than price decreases, thus a kink in the demand curve and a gap in MR • Graphical model

  5. Cartel Model • Model of collusion; e.g.., OPEC, NCAA • Set price and output like a monopolist • Methods of allocating production • Based on past sales, production capacity, regional distribution, or behave like a multi-plant monopolist • Ease of formation • Few firms, similar product, similar costs • Mathematical example

  6. Price Leadership • One firm is price leader--price searcher • Other firms follow--price takers (P = MRF) • Followers produce all they want at set price • Leader produces to satisfy market demand • QL = QT - QF • Mathematical example

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