oligopoly pricing and output
Post on 31-Dec-2015
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Oligopoly Pricing and Output
• Various models
• Common thread--interdependence assumption--how will competitors react to price and output changes
• At least 2 firms--at least 1 with a significant market share
• Pure or differentiated
Models of Oligopoly
• Cournot model
• Kinked demand curve
• Cartel model--collusion
• Price leadership-barometric or dominant firm
Cournot Model (1838)
• Simple duopoly
• Each firm is a profit maximizer
• Each firm assumes that regardless of own output, other firm’s output will not change
• A observes B producing QB and assumes that regardless of QA, QB = 0
• Mathematical example
Kinked Demand Curve
• Sweezy Model (1939)
• Price cuts will be followed to protect market share
• Price increases will not be followed
• Demand curve is more elastic for price increases than price decreases, thus a kink in the demand curve and a gap in MR
• Graphical model
Cartel Model
• Model of collusion; e.g.., OPEC, NCAA• Set price and output like a monopolist• Methods of allocating production
– Based on past sales, production capacity, regional distribution, or behave like a multi-plant monopolist
• Ease of formation– Few firms, similar product, similar costs
• Mathematical example
Price Leadership
• One firm is price leader--price searcher
• Other firms follow--price takers (P = MRF)
• Followers produce all they want at set price
• Leader produces to satisfy market demand
• QL = QT - QF
• Mathematical example
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