Duopoly in Computer CPUs

In CPU market, Intel Corporation

and AMD Inc. are two major players.
Each of them must take the Price
and Output of the other into
consideration while making its own
Pricing and Output decisions.
Why?

Chapter 16
Oligopoly

Overview

Monopoly & Perfect Competition

Markets with only a Few Sellers--Oligopoly
Game Theory and The Economics of Cooperation
Public Policy Towards Oligopolies

Four Types of Market

Structure
Number of Firms?
Many
firms
One
firm

Monopol
y
Tap
water
Cable
TV

Few
firms

Type of Products?
Differentiate
d products

Oligopol
y
Tennis
balls

Monopolist
ic
Competitio
n

Identica
l
product
s
Perfect
Competitio
n

Novels,
CD

Wheat

Crude oil

Movies

Milk

Hockey

Toothpas

Imperfect Competition
Monopolistic Competition
Many firms selling products that are similar but not
identical.
e.g. Movies, Soap, Toothpaste, Pizza.

Oligopoly
Only a few sellers, each offering a similar or identical
product.
e.g. Hockey skates (Bauer and CCM), Crude Oil
(OPEC), Automobiles, Steel,
Petrochemicals.

Markets with only a Few

Sellers:
Oligopoly:
Because of the few sellers, the actions
of any one seller in the market can
have a large impact on the profits of
all the other sellers.
A

duopoly is an oligopoly with only two members. It

is the simplest type of oligopoly.

Characteristics of an Oligopoly Market

Few

sellers offering similar product

Interdependence among firms in industry.
Best off by co-operating and acting like a
monopolist.
But such explicit cooperation may not be possible
due to antitrust laws or due to temptation for
cheating.

Demand Schedule for Water (MC =

0)
Quantity
0
10
20
30
40
50
60
70
80
90
100
110
120

Price
$120
110
100
90
80
70
60
50
40
30
20
10
0

Total Revenue
$ 0
1,100
2,000
2,700
3,200
3,500
3,600
3,500
3,200
2,700
2,000
1,100
0

Price and Quantity Supplied

The price of water in a perfectly

competitive market would be driven to

where MC = 0:
P = MC = $0; Q = 120 gallons
The price and quantity in a monopoly
market would be where total profit is
maximized:
P = $60; Q = 60 gallons
Oligopoly Q = ??

Competition, Monopolies, and Cartels

Collusion/Cartel
The

two firms may agree on the

quantity to produce and the price to
charge.
The two firms may join together and
act in unison, in effect as a
monopolist. Examples: OPEC, NCAA.

Competition, Monopolies, and Cartels

Although oligopolists would like to form cartels and earn monopoly
profits, Antitrust laws prohibit explicit agreements among
oligopolists as a matter of public policy.

The Equilibrium for an Oligopoly

A Nash equilibrium is a
situation in which economic
agents interacting with one
another each chooses his/her
best strategy given the
strategies that all the others
have chosen.

Reaction Curves and Cournot Duopoly

Equilibrium
Q1

Firm 1s reaction curve shows how much it

will produce as a function of how much
it thinks Firm 2 will produce.

100

75

Firm 2s Reaction
Curve
Firm 2s reaction curve shows how much it
will produce as a function of how much
it thinks Firm 1 will produce.

50 x

Nash Eqlbm
25

Firm 1s Reaction
Curve
25

50

75

100

Q2

A Non-Collusive Duopoly/Oligopoly
Oligopolies pursuing their own self-

interest, but acting independently.

Production is greater than the monopoly
quantity but less than the competitive
industry quantity.
Market prices are lower than monopoly
but greater than competitive price
(marginal cost.)
Total profits are less than the monopoly
profit.

How the Size of an Oligopoly Affects

the Market Outcome?
When

the number of sellers increase,

it has two effects:

The output effect: Because P > MC, selling more at

the going price raises profits.
The price effect: Raising production lowers the price
and the profit per unit on all units sold.

How the Size of an Oligopoly

Affects the Market Outcome?
As the number of sellers grows, an oligopolistic market looks more and
more like a competitive market.
The price approaches marginal cost, and the quantity produced
approaches the socially efficient level.
The profits then tends to be smaller.

Case Study:OPEC and

Worlds Oil Market
Like any Cartel, OPEC tries to raise price through coordinated
reduction in production.
The problem is each member is tempted to cheat by increasing
production and capturing a larger share of the market.
OPEC was most successful as a cartel between 1973-1985.

Game Theory and the

Economics of Cooperation
Game

theory is the study of how people behave in strategic situations.

Strategic decisions are those in which each person, in deciding what
actions to take, must consider how others might respond to that action.

The Economics of Cooperation

Prisoners

Dilemma: illustrates the difficulty in

maintaining co-operation.

Often people (firms) fail to co-operate with one another

even when co-operation would make them better off.

analogi
Keputusan Eric

Mengaku

K
e
p
ut
u
sa
n
D
a
wi
n

Men
gak
u

Tutu
p
Mul
ut

Tutup Mulut

Eric dipenjara
Eric dipenjara 20
tahun

Dawin dipenjara 8 tahun

Dawin bebas

Strategi Dominan
(Dominant Strategy)

8 tahun

Bebas

Dawin dipenjara 20 tahun

Eric
Eric dipenjara 1
tahun

Dawin dipenjara 1 tahun

Pilihan Terbaik

Oligopoli sebagai dilema

tahanan

Oligopoli sebagai dilema

tahanan

Ternyata permainan yang dimainkan oleh

perusahaan-perusahaan di pasar
oligopoli dalam mencoba mencapai hasil
monopoli mirip dengan permainan yang
dimainkan oleh kedua tahanan dalam
dilema tahanan.

Analogi 2
Keputusan Marlboro

K
e
p
ut
u
sa
n
C
a
m
el

Me
mas
ang
Ikla
n
Tida
k
Me
mas
ang
Ikla
n

Memasang Iklan
Tidak Memasang Iklan
Marlboro memperoleh keuntungan Marlboro
memperoleh
$3 miliar
keuntungan $2 miliar

Camel memperoleh keuntungan Camel

memperoleh
$3 miliar
keuntungan $5 miliar
Marlboro memperoleh keuntungan Marlboro
memperoleh
$5 miliar
keuntungan $4 miliar

Camel memperoleh keuntungan Camel

memperoleh
$2 miliar
keuntungan $4 miliar

Strategi Dominan
(Dominant Strategy)

Pilihan Terbaik

Contoh lain dilema tahanan

(dalam oligopoly)

Perlombaan

Senjata (Arms Race)

Pemasangan Iklan (Advertising)
Mengelola Sumber Daya Bersama
(Management of Common Resources)

Public Policy Toward Oligopolies

Firms

in oligopolies have a strong incentive to

collude in order to:

reduce

production
raise prices and in turn raise
profits
At

the same time they have strong incentives to

drive others out of business so that they can
capture the entire market.

Case Study: Collusion in Quebec

Driving Schools
In

1987, several QB driving schools colluded to fix

the price of driving school services and held almost
94% of Sherbrooke market.
Shortly after the agreement, many of them broke
off.
The major players threatened these renegade
competitors and also punished them with
predatory pricing.

Public Policy Toward Oligopolies

From the standpoint of society, cooperation among oligopolists is
undesirable because

it leads to production that is too low and

prices that are too high

Then What should government do to protect the

consumers?

Public Policy Toward Oligopolies

Competition Act:
Makes it illegal to restrain trade or
attempt to monopolize a market.
Consists of:

criminal provisions
civil provisions

Competition Act
Criminal

provisions may include:

Price

Fixing, Rigging Bids

Price Discrimination
Predatory Pricing
Civil

provisions include mergers which may not be

in the public interest.

Two Other Interesting

Games
Location

Game
Battle of Sexes
1. Beach Location Game
Two

competitors selling soft drinks for

the same price.
Beach 200 yards long and Sunbathers
are spread evenly along the beach.
Customers will buy from the closest
vendor.

Beach Location Game

Ocean
C

Where

Beach

200 yards

will the competitors locate

(i.e. where is the Nash
equilibrium)?
Similar location game is played by
gas stations, car dealers, etc

The Battle of the Sexes

Joan
Wrestling

Opera

Wrestling

2,1

0,0

Opera

0,0

1,2

Jim

What is the Nash Eqlbm. of this game?