Market and Cost Structure
Oligopoly
In a oligopoly market structure, there are a few interdependent firms that change their prices according to their competitors. Ex: If Coca Cola changes their price, Pepsi is also likely to.
Characteristics:
* Few interdependent firms * A few barriers to entry * Products are similar, but firms try to differentiate them * There is branding and advertising * Imperfect knowledge (where customers don’t know the best price or availability)
Revenue Curves
Total Revenue
Total Revenue Curve
Average & Marginal Revenue
Average & Marginal Revenue
Total Revenue - Total Quantity x Price.
Marginal Revenue – the revenue earned by selling one more units.
Average Revenue - total revenue/quantity. Since all the units are the same price, each new unit would have the same average revenue, so the marginal revenue = total revenue.
To compete or collaborate?
Since firms are interdependent, they have the choice of competing against other firms or collaborating with them. By competing they may increase their own market share at the expense of their competitors, but by collaborating, they decrease uncertainty and the firm’s together act as a monopoly.
Collaboration
* When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. They agreement can be formal or informal. * A formal agreement is a cartel and is generally illegal. OPEC is a legal cartel but it’s signed between countries and not firms. * In an informal agreement, the firms behave as a monopoly and choose the output that maximizes output. The diagram would be like the monopoly profit maximize. * Collaborations are unlikely to last as firms have an incentive to cheat. They all would like the other members to restrict the output to what had been decided but would want to increase their own output. However, if they are a few large firms with similar costs and rising demand, the agreement is likely
In a oligopoly market structure, there are a few interdependent firms that change their prices according to their competitors. Ex: If Coca Cola changes their price, Pepsi is also likely to.
Characteristics:
* Few interdependent firms * A few barriers to entry * Products are similar, but firms try to differentiate them * There is branding and advertising * Imperfect knowledge (where customers don’t know the best price or availability)
Revenue Curves
Total Revenue
Total Revenue Curve
Average & Marginal Revenue
Average & Marginal Revenue
Total Revenue - Total Quantity x Price.
Marginal Revenue – the revenue earned by selling one more units.
Average Revenue - total revenue/quantity. Since all the units are the same price, each new unit would have the same average revenue, so the marginal revenue = total revenue.
To compete or collaborate?
Since firms are interdependent, they have the choice of competing against other firms or collaborating with them. By competing they may increase their own market share at the expense of their competitors, but by collaborating, they decrease uncertainty and the firm’s together act as a monopoly.
Collaboration
* When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. They agreement can be formal or informal. * A formal agreement is a cartel and is generally illegal. OPEC is a legal cartel but it’s signed between countries and not firms. * In an informal agreement, the firms behave as a monopoly and choose the output that maximizes output. The diagram would be like the monopoly profit maximize. * Collaborations are unlikely to last as firms have an incentive to cheat. They all would like the other members to restrict the output to what had been decided but would want to increase their own output. However, if they are a few large firms with similar costs and rising demand, the agreement is likely