Oligopoly

Oligopoly

Two examples of
oligopoly
Market shares of the
largest brewers
Market shares of the
largest brewers
$ per barrel
Oil prices
Actual price
35
Iraq invades Impending
Iran OPEC’s first war
30 quotas with Iraq

Iraq invades
Revolution Kuwait
25 World-wide
in Iran recovery

20 First oil from

North Sea
World-wide
15 slowdown
Cease-fire in New OPEC
10 Iran-Iraq war quotas Recession
in Far East
Yom Kippur
5 War: Arab oil
embargo

0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
$ per barrel
Oil prices Actual price
Cost in 1973 prices
35
Iraq invades Impending
Iran OPEC’s first war
30 quotas with Iraq

Iraq invades
Revolution Kuwait
25 World-wide
in Iran recovery

20 First oil from

North Sea
World-wide
15 slowdown
Cease-fire in New OPEC
10 Iran-Iraq war quotas Recession
in Far East
Yom Kippur
5 War: Arab oil
embargo

0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
 Oligopoly

A profit-maximising
cartel
 Profit-maximising cartel
£

Industry D AR

O Q
 Profit-maximising cartel
£

Industry MC

P1

Industry D AR
Industry MR
O Q1 Q
 Oligopoly

Price leadership
(assumption of fixed
market share)
Price leader aiming to maximise profits for a given market share

£
Assume constant
market share
for leader

AR D market

AR D leader

MR leader
O Q
Price leader aiming to maximise profits for a given market share

MC

l t
PL
AR D market

AR D leader

MR leader
O QL QT Q
 Oligopoly

Game theory
Profits for firms A and B at different prices

X’s price
£2.00 £1.80

A B
£2.00 £10m each £5m for Y
£12m for X
Y’s price
C D
£1.80 £12m for Y £8m each
£5m for X
 The prisoners' dilemma

Amanda's alternatives
Not confess Confess

Not
A B Nigel gets
Each gets 10 years
confess Amanda gets
1 year
Nigel's 3 months
alternatives C Nigel gets D
3 months Each gets
Confess 3 years
Amanda gets
10 years
 Oligopoly

A decision tree
 A decision tree

Boeing –£10m
a ter Airbus –£10m
(1)
Airbus 00 s e
5
decides
B1 400
r s eate
r Boeing +£30m (2)
ate
se

Airbus +£50m
0
50

Boeing
decides A 40
0s Boeing +£50m
ea a ter (3)
te s e Airbus +£30m
r 50 0
B2 400
sea
Airbus t er
decides Boeing –£10m
Airbus –£10m
(4)
 Oligopoly

Kinked demand curve

theory
 Kinked demand for a firm under oligopoly
£

Current price
and quantity
give one point
on demand curve
P1

O Q1 Q
 Kinked demand for a firm under oligopoly
£

D
P1

D
O Q1 Q
Stable price under conditions of a kinked demand curve
£

MC2

P1 MC1

a
D AR
b

O Q1 Q
MR