Oligopoly models. Module 18: Models of Oligopoly 2022-10-29
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Oligopoly: List of Oligopoly Models
But as embodied in the assumptions of the model, producer A will assume that producer B will continue to produce output DI. We show this gap as the dashed segment in the combined marginal-revenue curve MR 2 fgMR 1 in Price InflexibilityThis analysis helps explain why prices are generally stable in noncollusive oligopolistic industries. On the other hand, if the organization increases the price, the competitor organizations would also cut down their prices. But such agreement is more difficult to achieve where there are, say, 10 firms, each with roughly 10 percent of the market, or where the Big Three have 70 percent of the market while a competitive fringe of 8 or 10 smaller firms battles for the remainder. A Nash equilibrium is a correspondence of best response functions which is the same as a crossing of the reaction curves. The example here are the retail gas stations that bought the wholesale gas from the refiners and are now ready to sell it to consumers.
Oligopoly Defined: Meaning and Characteristics in a Market
We still have identical goods, for consumers the gas that goes into their cars is all the same and we will assume away any other differences like cleaner stations or the presence of a mini-mart. Oligopoly markets are markets in which only a few firms compete, where firms produce homogeneous or differentiated products and where barriers to entry exist that may be natural or constructed. Kinked-Demand Theory: Noncollusive Oligopoly Imagine an oligopolistic industry made up of three hypothetical firms Arch, King, and Dave's , each having about one-third of the total market for a differentiated product. Second, individual firms have an incentive to cheat the cartel. At less than the desired level of sales, the marginal costs of A or B or both are likely to be less than p 1.
. There is a single firm in the market serving many consumers. B In Betrand oligopoly firms produce a differentiated product at an increasing marginal cost and engage in price competition. Lets imagine a simple situation where there two gas stations, Fast Gas and Speedy Gas on either side of a busy main street. Stackelberg Model A Stackelberg oligopoly is one in which one firm is a leader and other firms are followers. This means the price is lower because the demand curve is downward sloping.
If the firm is on the inelastic part and raises the price, the others will not follow suit. These levels of outputs ensure the maximum joint profits of member organizations. The reason there are more than one model of Cartelization An oligopoly can maximize its profits by colluding and forming a cartel. In such a case, the oligopolistic organization cannot increase the prices. Then the conspirators are less likely to cheat on the price agreement. In the automobile industry, price adjustments traditionally have been made when new models are introduced each fall.
Businesses in such a market collaborate to dominate the rest of the players and maximize joint revenue. Helps organizations to increase their performance ADVERTISEMENTS: ii. As a result of this awareness of mutual interdependence, producer 1 would decide to produce output OS equal to output D 2L of producer 2. Therefore, to understand the kinked demand curve model, it is important to note the reactions of rival organizations on the price changes made by respective oligopolistic organizations. At point Y, the organization would achieve maximum profit.
1.5 Monopolistic Competition, Oligopoly, and Monopoly
Edgeworth, a French economist formulated a duopoly model. Collusion can be Formal or Informal. An oligopoly is a market structure characterized by significant interdependence. Formations of oligopolies Collusive oligopolies are monopolist that creates a cartels markets to eliminate competition and control the market share. His duopoly model consists of two firms marketing a homogenous good. Of course, Gypsum can retaliate by cutting its price too, but this will move all three firms down their demand curves, lowering their profits.
Oligopoly Models: Sweezy’s Kinked Demand Curve Model and Collusion Model
Thus price war continues until the competitive price p c is reached. Other oligopolies may behave more like Cournot oligopolists, with an outcome somewhere in between perfect competition and monopoly. If the price falls below p c, it may remain there inspite of excess demand. Let us suppose that at this point the other firm viz. Criticisms of the ModelThe kinked-demand analysis has two shortcomings.
This is owing to the assumption that the cost of production is zero. And since both the quantity produced and the price received are lower for the Stackelberg follower compared to the Cournot outcome, the profits must be lower as well. In many other instances collusion is much subtler. Legal Obstacles: Antitrust LawU. When OIBP 1 is the total profit, producer A will earn profits equal to ODGP 1 and producer B will earn profit equal to DIBA. If the oligopolistic organization increases the price and rivals do not follow it, then consumers may switch to rivals. Chamberlin, Cournot and Competition : When the number of sellers is very small, they may consider all the indirect effects of their output decisions, in which case the Chamberlin solution results.