OligopolyOligopoly

OligopolyOligopoly

Two examples of oligopoly

Two examples of oligopoly

Market shares of thelargest brewers

Market shares of thelargest brewers

Market shares of thelargest brewers

Market shares of thelargest brewers

0

5

10

15

20

25

30

35

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

$ per barrel Actual price

Yom KippurWar: Arab oil

embargo

First oil fromNorth Sea

Revolutionin Iran

Iraq invadesIran OPEC’s first

quotas

Cease-fire inIran-Iraq war Recession

in Far East

Iraq invadesKuwait

New OPECquotas

World-widerecovery

World-wideslowdown

Impendingwar

with Iraq

Oil pricesOil prices

0

5

10

15

20

25

30

35

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

$ per barrel Actual priceCost in 1973 prices

Yom KippurWar: Arab oil

embargo

First oil fromNorth Sea

Revolutionin Iran

Iraq invadesIran OPEC’s first

quotas

Cease-fire inIran-Iraq war Recession

in Far East

Iraq invadesKuwait

New OPECquotas

World-widerecovery

World-wideslowdown

Impendingwar

with Iraq

Oil pricesOil prices

OligopolyOligopoly

A profit-maximising cartel

A profit-maximising cartel

£

Q O

Industry D AR

Profit-maximising cartelProfit-maximising cartel

£

Q O

Industry D AR

Industry MC

Industry MR

Q1

P1

Profit-maximising cartelProfit-maximising cartel

OligopolyOligopoly

Price leadership

(assumption of fixed market share)

Price leadership

(assumption of fixed market share)

£

Q O

MR leader

AR D leader

AR D market

Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share

Assume constantmarket share

for leader

£

Q O

AR D market

MC

MR leader

PL

QT

AR D leader

QL

l t

Price leader aiming to maximise profits for a given market sharePrice leader aiming to maximise profits for a given market share

OligopolyOligopoly

Game theoryGame theory

Profits for firms A and B at different pricesProfits for firms A and B at different prices

£2.00 £1.80

£2.00

£1.80

X’s price

Y’s price

A B

C D

£10m each

£8m each£12m for Y£5m for X

£5m for Y£12m for X

The prisoners' dilemmaThe prisoners' dilemma

Not confess Confess

Notconfess

Confess

Amanda's alternatives

Nigel'salternatives

A B

C D

Each gets1 year

Each gets3 years

Nigel gets3 months

Amanda gets10 years

Nigel gets10 years

Amanda gets3 months

OligopolyOligopoly

A decision treeA decision tree

Boeingdecides

500

seat

er

500 seater

500 seater

400 seater

400 seater

400 seater

A decision treeA decision tree

Boeing –£10mAirbus –£10m

(1)

Boeing +£30mAirbus +£50m

(2)

Boeing +£50mAirbus +£30m

(3)

Boeing –£10mAirbus –£10m (4)

Airbusdecides

B2

Airbusdecides

B1

A

OligopolyOligopoly

Kinked demand curve theory

Kinked demand curve theory

Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly

£

QO

P1

Q1

Current priceand quantity

give one pointon demand curve

£

QO

P1

Q1

D

D

Kinked demand for a firm under oligopolyKinked demand for a firm under oligopoly

£

QO

P1

Q1

MC2

MC1

MR

a

bD AR

Stable price under conditions of a kinked demand curveStable price under conditions of a kinked demand curve