Monopolistic Competition
MARKET STRUCTURES – OLIGOPOLY (I) ASSUMPTIONS
1. A few dominant firms
How to measure whether an industry exhibits oligopoly :
2. Differentiated products
3. Relatively high barriers to entry
4. Strategic behavior
•
• is used to study strategic behavior
5. Many models to describe oligopoly
• Kinked demand curve
• Duopoly : Cournot, Stakleberg, Bertrand
• Price leadership
(II) STRATEGIC BEHAVIOR
(1) Collusive agreements and Cartels
Collusive agreements is defined as an agreement between two or more producers to restrict output in order to raise prices and profits
Cartel is defined by a group of firms entering into this collusive agreement
Example : OPEC
Consists of: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
OPEC did an oil embargo in 1973 which lasted one year and oil prices quadrupled. This caused cost-push inflation in many countries which depended on OPEC.
What determines the success or failure of cartels?
1. Barriers to entry
2. Demand elasticity
3. Whether it is easy to monitor each firm’s output
4. Legal implications
(2) Non-collusion
Firms may not enter into a collusive agreement because it is against the law. Therefore they either cooperate implicitly or they try to conjecture or anticipate what their competitors will do.
OLIGOPOLY MODELS :
Kinked Demand Curve
Developed by Paul Sweezy who attempted to explain why prices in oligopoly industry tend to remain sticky or rigid despite moderate changes in cost, technology and demand conditions
Assumptions
Rivals will match a price decrease but ignore a price increase.
Therefore, the oligopolist’ demand curve will be elastic for price increase and inelastic for price decrease.
Show two demand curves: elastic and inelastic
Suppose the price charged is determined at P*
• If firm raises its price above P*, rivals will
1. A few dominant firms
How to measure whether an industry exhibits oligopoly :
2. Differentiated products
3. Relatively high barriers to entry
4. Strategic behavior
•
• is used to study strategic behavior
5. Many models to describe oligopoly
• Kinked demand curve
• Duopoly : Cournot, Stakleberg, Bertrand
• Price leadership
(II) STRATEGIC BEHAVIOR
(1) Collusive agreements and Cartels
Collusive agreements is defined as an agreement between two or more producers to restrict output in order to raise prices and profits
Cartel is defined by a group of firms entering into this collusive agreement
Example : OPEC
Consists of: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
OPEC did an oil embargo in 1973 which lasted one year and oil prices quadrupled. This caused cost-push inflation in many countries which depended on OPEC.
What determines the success or failure of cartels?
1. Barriers to entry
2. Demand elasticity
3. Whether it is easy to monitor each firm’s output
4. Legal implications
(2) Non-collusion
Firms may not enter into a collusive agreement because it is against the law. Therefore they either cooperate implicitly or they try to conjecture or anticipate what their competitors will do.
OLIGOPOLY MODELS :
Kinked Demand Curve
Developed by Paul Sweezy who attempted to explain why prices in oligopoly industry tend to remain sticky or rigid despite moderate changes in cost, technology and demand conditions
Assumptions
Rivals will match a price decrease but ignore a price increase.
Therefore, the oligopolist’ demand curve will be elastic for price increase and inelastic for price decrease.
Show two demand curves: elastic and inelastic
Suppose the price charged is determined at P*
• If firm raises its price above P*, rivals will