Chapter 9

slide 1

OLIGOPOLY
A Small Number of Large Firms
Dominate the Market.
The firms fortunes are interdependent.
Each firms actions affect the profits of
its few rivals.
Porters Five-Forces
Model
Supplier
Power

Entry

Internal
Rivalry
Substitutes &
Complements

Buyer
Power

OLIGOPOLY
A Small Number of Firms Dominate the Market.
The Degree of Market Dominance is Measured
by the Concentration Ratio.
CR = Percentage of Sales of the
top 4 (8 or 20) Firms.
Good or Service
Concentration Ratio
4 Firms
8 Firms
Glass Containers
91
97
Beer
90
93
Breakfast Foods
83
94
Motor Vehicles
80
96
Tires
68
86
Book Stores
65
71
Snack Foods
57
64
Motion Pictures
51
67
Fast Food
44
57
Lawn Equipment
40
57
Air Flights
34
51

9.2

Dominant Firm
acting as Price Leader

9.3
Industry Demand

S
Supply Curve
for Small Firms

Leaders
Net Demand

d
P*
MR
MC

Leader produces Q*,

Small firms produce QS.

Q*

QS

9.4

QUANTITY COMPETITION
The Cournot Model.
Two Firms supply a market, where
Demand is: P = 30 Q1 - Q2.
For each, LAC = LMC = $6/unit.
Set MR = MC
MR1 = [30 - Q2] 2Q1 = 6.
Thus,

Q1 = 12 - .5Q2.

The greater is the rivals

output then the less is
your own output.

Similarly, Q2 = 12 - .5Q1.
In Equilibrium, Q1 = Q2 = 8.
In turn, P = 30 16 = $14, and
Each firms profit is: (14 6)(8) = $64.

The Cournot Model (continued).

9.5
MR1 = [30 - Q2 .. - QN] 2Q1 = 6.
For N Firms,
P = 30 Q1 - Q2 Q3 - QN.

Thus, Q1 = 12 - .5(Q2 + QN).

Firms produce identical outputs,
so, Qi = 12 - .5(N-1)Qi.

$30

$18
$14
$12
$10
$7.5

So, Q1 = Q2 = QN = 24/(N+1).
N QTotal P
1 12
18
2 16
14
12
3 18
5 20
10
7.5
15 22.5
LAC = LMC = $6

Total Output

STABLE PRICES w/ KINKED DEMAND

Price
P*
Demand

MC
MC

MR

Q*

Output

With kinked demand, price is stable

even as costs change.

9.6

9.7

A Price War
If Both charge $8, Each Sells 2.5 M units.
If Both charge $6, Each Sells 3.5 M units.
If One charge $8 and the Other $6,
They Sell 1.25 M and 6 M units.
P2 = $8

P2 = $6

P1 = $8

10, 10

12
5, 12

P1 = $6

12, 5
12

77, 77

What is the Result of

Strict Competition?

Low Prices: (7, 7)

MC = $6

9.8

A Price War (Revisited)

If Both charge $8, Each Sells 2.5 M units.
If Both charge $6, Each Sells 3.5 M units.

MC = $6

What if there is strong Brand Allegiance.

So, if One charge $8 and the Other $6,
They sell 2 M and 4 M units.
P2 = $8

P2 = $6

P1 = $8

10
10, 10
10

8 8
8,

P1 = $6

8, 88

7, 7

Now, what is the Result of

Competition?

High Prices: (10, 10) !