Oligopoly ppt free download as powerpoint presentation. The word oligopoly is derived from two greek words oligi meaning few and polein meaning to sell. Product choice and oligopoly market structure by michael j. Mazzeo kgsm department of management and strategy march, 2000 this paper is a revised version of essay 1 of my stanford university ph. In other words, the oligopoly market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market and have control over the price of. Common models that explain oligopoly output and pricing decisions include cartel model, cournot model, stackelberg model, bertrand model and contestable market theory. Oligopolyquestion 1there is clear evidence that the uk supermarket sector, as with the supermarket sectors in many economies, is increasingly dominated by a few firms. The oecd competition committee debated oligopolies in 1999. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. Monopolistic competition and oligopoly the models of perfect competition and monopoly discussed in the previous two chapters represent two extreme market structures. Overview and quantity competition with large fixed costs by eric maskin and jean tirole the paper introduces a class of alternatingmove infinitehorizon models of duopoly. Within noncooperative oligopoly theory a distinction is made between models in which firms choose quantities and those in which they choose prices. Influences on pricing and markup in segmented manufacturing markets. It is, for instance, readily shown that if the standard bertrand equilibrium would hold if sellers were limited to.
As a quantitative description of oligopoly, the fourfirm concentration ratio is often utilized. Pdf externality and timing of entry in oligopoly models. While the earlier ideas of cournot, hotelling, and chamberlin are presented, the larger part of the book is devoted to the modern work on oligopoly that has resulted from the application of dynamic techniques and game theory to this area. Antoine augustin cournot was a french philosopher and mathematician.
This paper demonstrates that 1 the nash choice of the optimal proportional mark up on marginal costs yields lower prices and profits than cournot behaviour but higher prices and profits than the optimum fixed mark up. View test prep chapter 9 basic oligopoly models from econ 3602 at carleton college. The cournot and stackelberg models assume firms compete by altering. Winckler, antoine and marc hansen 1993 collective dominance under the ec merger. An oligopoly exists between two extreme market structures, perfect competition, and monopoly. An oligopoly is a market structure characterized by significant interdependence. Oligopoly models cournot vs stackelberg vs bertrand. Firms entry, oligopolistic competition and labor market dynamics dnb. Hirschmanherndal index note that the hhi only measures market power under the assumptions of the cournot model if the market involves di. This classification is made on the basis of freedom to enter into the new industry. Training on understanding oligopoly market structure for ct 7 economics by vamsidhar ambatipudi.
You can learn more about financing from the following articles examples of elasticity demand. Characteristics of oli lf an oligopoly firms have market power derived from barriers to entry however, a small number of firms compete with each othercompete with each other each firm doesnt have to consider the actions of otherconsider the actions of other. An oligopoly market situation is also called competition among the few. It is a theory of price change, but not the price level. A cournot equilibrium is a nash equilibrium to the cournot model. This kind of imperfect competition is characterized by having a relatively scarce amount of firms, but always more than one, which produce a homogeneous good.
An example of a pure oligopoly would be the steel industry, which has only a few producers but who produce exactly the same product. The analysis of oligopoly behaviour under the noncooperative assumption forms the basis of oligopoly theory. Machinereadable bibliographic record marc, ris, bibtex. Overview of oligopoly theory and summary of the chapter. I am grateful to tim bresnahan for all his advice and help throughout the project. An oligopoly consists of a select few companies having significant influence over an industry. In this article, we will look at oligopoly definition and some important characteristics of this market structure. Due to the small number of firms in the market, the.
The collusion model the collusion model states that if the small number of firms that make up a oligopoly were able to get together and make. The main idea of this study is to provide a conceptual model of a game in conditions of oligopoly based on feedback loops and system dynamics approach and explore the dynamics prevailing in a game. Profit maximization in four oligopoly settings sweezy kinkeddemand model cournot model stackelberg model bertrand model iv. The contestable market model is a model of oligopolies where barriers to entry and exit, not market.
Oligopoly is defined as a market structure with a small number of firms, none of which can keep the others from having significant influence. Barriers to entry there are barriers to entry into an oligopoly, making oligopolies different from competitive markets with a large number of relatively small firms. Oecd glossary of statistical terms oligopoly definition. Pure because the only source of market power is lack of competition. Here we discuss the practical examples of oligopoly which include the technology industry, automobile industry, media industry, and pharma sector. An open oligopoly is the market situation wherein firm can enter into the industry any time it wants, whereas, in the case of a closed oligopoly, there are certain restrictions that act as a barrier for a new firm to enter into the industry. Oligopoly theory lies at the heart of industrial organisation io since its object of study is the interdependence of firms. Among the topics not being covered are models in which multiple sellers compete by offering contracts to buyers. In a model of collusive oligopoly, we discuss the economics of agreement between the firms in an undifferentiated oligopolistic industry. Let us now study price and output determination under oligopoly. Pdf a dynamic model of oligopolistic market structure, featuring. In particular, in the context of oligopoly an explanation of the size of the mark up is required to complete the link between the cost level and the price level.
An oligopoly market structure involves two or more companies that dominate the industry, offering similar products and competing in terms of price. Different models of price and output determination under oligopoly have been. In the framework of symmetric cournot oligopoly, this paper provides two minimal sets of assumptions on the demand and cost functions that imply respectively that, as the number of firms increases. The first treatment of oligopoly is cournots and dates back to 1838 see. Training on understanding oligopoly market structure for ct 7. Different models for price and output determination under. Models of oligopoly behavior there is no single model of oligopoly behavior the cartel model is when a combination of firms acts as if it were a single firm and a monopoly price is set an oligopoly model can take two extremes. Two gametheoretic models of oligopolistic behavior in homogeneous good markets. Rearrange to get expression for cournot markup or lerner index l1. Meanwhile, an oligopoly involves two firms or more.
Chapter 9 basic oligopoly models basic oligopoly models. In conjectural variation models the firms in the industry are taken as given and each firm makes certain assumptions about what the others reactions will be to its own actions. If price competition within an oligopoly is sufficiently fierce, then there is little scope for price discrimination. The second is to assume that firms behave independently or noncooperatively. In the cournot model, firms choose quantities simultaneously and independently, and industry output determines price through demand. Using example, indicate how supermarkets compete with each other. As compared to the classical oligopoly models of cournot, bertrand, and edgeworth the chamberlins oligopoly model is comparatively more advanced and superior. Product choice and oligopoly market structure michael j.
Pdf in their efforts to create and maintain a position in a market, firms make. Marks 1998 oligopoly 1 oligopoly and strategic pricing in this section we consider how. Technically, there is not a maximum number of firms that can exist in an oligopoly, but as a rule there have to be so few powerful firms in an industry that anything one firm does has a major effect on. The cournot oligopoly model is the most popular model of imperfect competition. Oligopoly theory made simple university at albany, suny. There are two general types of theories for oligopoly. Oligopoly is a common market form where only a limited number of firms are in competition.
Learn vocabulary, terms, and more with flashcards, games, and other study tools. Although these models are useful in explaining how markets operate, in practice most markets fall somewhere between the two extremes. The model endogenizesfirms producttype decisions, measures how effects of competitors differ depending on their product types, and can incorporate alternative specifications for the. Cournots duopoly model sweezys kinked demand curve model price leadership models collusive models. Basic oligopoly models chapter 9 oligopoly a market situation where there are very few sellers. Discussion of how to set up and solve stackelberg, cournot, and bertrand oligopoly models. When these firms get together and agree to set prices and outputs so as to maximise total industry profits, they are known as a cartel. Collusive oligopoly or cartel model microeconomics. However, most markets dont fall into either category. As with price rigidity, mark up pricing is not a complete theory of pricing. Mazzeo i propose an empirical model to analyze product differentiation and oligopoly market structure.
When a few firms dominate the market for a good or service is called oligopoly. Request pdf on jan 1, 2002, tonu puu and others published oligopoly dynamics. Oligopoly questions economics online economics online. Oligopolists tend to match their competitors advertising efforts, prices and loyalty schemes. Models and tools find, read and cite all the research you need on. For example, think of the market for soda both pepsi and coke are major producers, and they dominate the market. Much of traditional microeconomics presumes that firms act as passive pricetakers, and thus avoids the complex issues involved in. The oligopoly market characterized by few sellers, selling the homogeneous or differentiated products. The cartel arrangement the game theory prisoners dilemma 2. Chamberlins model is based on the assumption that the oligopolistic firms understand and recognize the mutual interdependence and behave accordingly. The cournot model delivers standard deviations of the price markup and the labor share of income very close to their empirical counterparts. James friedman provides a thorough survey of oligopoly theory using numerical examples and careful verbal explanations to make the ideas clear and accessible. To convince courts that parallel behaviour has arisen through some kind of agreement rather than merely resulting from oligopolistic interdependence, competition. Buyer power is often neglected in oligopoly models, the standard assumption.
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