Oligopoly and Match Price

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Oligopoly

After reading this chapter, you should know:
1. The unique characteristics of oligopoly.
2. How oligopolies maximize profits.
3. How interdependence affects oligopolists' pricing decisions.

Problems for Chapter 10

1.Suppose the automobile market in the U.S. is divided as follows:

General Motors28%
Ford23%
Toyota18%
Daimler-Chrysler16%
All others15%

a) What is the four firm concentration ratio?
b) What is the approximate Herfindahl-Hirschman Index?

2.Assume an oligopolist confronts two possible demand curves for its own output, as illustrated below. The first (A) prevails if other oligopolists don’t match price changes. The second (B) prevails if rivals do match price changes.

Price ($)

$10
9
8
7
6
5
4Demand A
3
2
1Demand B

02468101214

Quantity (units per period)

a) By how much does quantity demanded change if price is reduced from $10 to $4 and
i) Rivals match price cut?
ii) Rivals don’t match price cut?

b) By how much does quantity demanded change if price is raised from $4 to $9 and
i) Rivals match price hike?
ii) Rivals don’t match price hike?

3.Suppose the following schedule summarizes the sales situation confronting an oligopolist in the beverage industry:

Price (per unit) |$0.30 |$0.40 |$0.50 |$0.60 |$0.70 |$0.80 |$0.90 | |Quantity demanded per period (in millions) |10 |9 |8 |7 |6 |5 |4 | |

Using the graph below,
a) Draw the demand and marginal revenue curves facing this firm. b) Identify the profit-maximizing rate of output in a situation where marginal cost is constant at $0.20 a unit.

$
1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

012345678910

(Quantity in millions)

4.Suppose Nike and Adidas spend enormous sums of money every year to promote...
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