Market Structures
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Market Structures
The Degree of Competition • Classifying markets – number of firms – freedom of entry to industry – nature of product – nature of demand curve
• The four market structures – perfect competition – monopoly – monopolistic competition – oligopoly
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
The Degree of Competition • Classifying markets – number of firms – freedom of entry to industry – nature of product – nature of demand curve
• The four market structures – perfect competition – monopoly – monopolistic competition – oligopoly
• Structure → conduct → performance
Perfect Competition • Assumptions – firms are price takers – freedom of entry – identical products – perfect knowledge
• Short-run equilibrium of the firm – price, output and profit
Short-run equilibrium of industry and firm under perfect competition P
£
MC
S
D = AR = MR
AR AC
Pe
D O
O Q (millions)
(a) Industry
AC
Qe Q (thousands)
(b) Firm
Loss minimising under perfect competition P
£ S
AC P1
AC
MC
D1 = AR1
AR1
= MR1
D O
O Q (millions)
(a) Industry
Qe Q (thousands)
(b) Firm
Perfect Competition • Assumptions – firms are price takers – freedom of entry – identical products – perfect knowledge
• Short-run equilibrium of the firm – price, output and profit
• The short-run supply curve of the firm
Deriving the short-run supply curve
P
£
S
MC = S a
P1 P2
b c
P3
D1 = MR1 D2 = MR2 D3 = MR3
D1 D3 O
Q (millions)
(a) Industry
D2 O
Q (thousands)
(b) Firm
Perfect Competition • Long-run equilibrium of the firm – all supernormal profits competed away – LRAC = AC = MC = MR = AR
Long-run equilibrium under perfect competition Profits return Supernormal New firms enter to normalprofits P
£
S1 Se
LRAC P1
AR1
D1
PL
ARL
DL
D O
O Q (millions)
(a) Industry
QL Q (thousands)
(b) Firm
Long-run equilibrium of the firm under perfect competition £
(SR)MC (SR)AC
LRAC
DL AR = MR
LRAC = (SR)AC = (SR)MC = MR = AR
O
Q
Perfect Competition • Incompatibility of economies of scale with perfect competition • Benefits of perfect competition – price equals marginal cost – prices kept low – firms must be efficient to survive
Monopoly • Defining monopoly • Barriers to entry – economies of scale – economies of scope – product differentiation and brand loyalty – lower costs for an established firm – ownership/control of key factors – ownership/control over outlets – legal protection – mergers and takeovers – aggressive tactics – intimidation
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR
Profit maximising under monopoly £
MC
MR O
Qm
Q
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR – Equilibrium price, found from demand curve
Profit maximising under monopoly £
MC AC
AR
AC
AR MR O
Qm
Q
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR – Equilibrium price, found from demand curve
• Profit – Measuring profit
Profit maximising under monopoly £
MC Total profit
AC
AR
AC
AR MR O
Qm
Q
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR – Equilibrium price, found from demand curve
• Profit – Measuring profit – Supernormal profit can persist in long run
Monopoly • Disadvantages of monopoly – high prices / low output: short run
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC
Monopoly P1
AR = D
MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC ( = supply under perfect competition)
Comparison with Perfect competition
P1 P2
AR = D
MR O
Q1
Q2
Q
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly – economies of scale
Equilibrium of industry under perfect competition and monopoly: with different MC curves £
MCmonopoly
P1
AR = D MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with different MC curves MC ( = supply)perfect competition
£
MCmonopoly P2 P1
x
P3
AR = D MR O
Q2
Q1
Q3
Q
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly – economies of scale – profits can be used for investment
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly – economies of scale – profits can be used for investment – high profits encourage risk taking
Monopoly • Contestable markets – importance of potential competition – a perfectly contestable market – contestable markets and natural monopolies – importance of costless exit
• Contestable markets and the public interest
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run
Short-run equilibrium of the firm under monopolistic competition £
MC AC
Ps ACs
AR = D MR O
Qs
Q
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run
Long-run equilibrium of the firm under monopolistic competition £
LRMC LRAC PL
ARL = DL MRL O
QL
Q
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
Long run equilibrium of the firm under perfect and monopolistic competition £
LRAC P1 P2
DL under perfect competition
DL under monopolistic competition O
Q1
Q2
Q
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition • The public interest
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition • The public interest – comparison with perfect competition
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition • The public interest – comparison with perfect competition – comparison with monopoly
Oligopoly • Key features of oligopoly – barriers to entry – interdependence of firms
• Competition versus collusion • Collusive oligopoly: cartels – equilibrium of the industry
Profit-maximising cartel £
Industry D = AR O
Q
Profit-maximising cartel £
Industry MC P1
Industry D = AR Industry MR O
Q1
Q
Oligopoly • Key features of oligopoly – barriers to entry – interdependence of firms
• Competition versus collusion • Collusive oligopoly: cartels – equilibrium of the industry – allocating and enforcing quotas
Oil prices
$ per barrel
Actual price
35 Iraq invades Iran
30
OPEC’s first quotas Iraq invades Kuwait
Revolution in Iran
25 20
Impending war with Iraq
World-wide recovery
First oil from North Sea World-wide slowdown
15 10
Cease-fire in Iran-Iraq war
New OPEC quotas
86
92
Recession in Far East
Yom Kippur War: Arab oil embargo
5 0 70
72
74
76
78
80
82
84
88
90
94
96
98
00
02
Oil prices
$ per barrel
Actual price Cost in 1973 prices
35 Iraq invades Iran
30
OPEC’s first quotas Iraq invades Kuwait
Revolution in Iran
25 20
Impending war with Iraq
World-wide recovery
First oil from North Sea World-wide slowdown
15 10
Cease-fire in Iran-Iraq war
New OPEC quotas
86
92
Recession in Far East
Yom Kippur War: Arab oil embargo
5 0 70
72
74
76
78
80
82
84
88
90
94
96
98
00
02
Oligopoly • Tacit collusion – price leadership: dominant firm
Price leader aiming to maximise profits for a given market share £
Assume constant market share for leader
AR = D market
AR = D leader MR leader O
Q
Price leader aiming to maximise profits for a given market share £
MC
PL
l
t AR = D market
AR = D leader MR leader O
QL
QT
Q
Oligopoly • Tacit collusion – price leadership: dominant firm – price leadership: barometric
Oligopoly • Tacit collusion – price leadership: dominant firm – price leadership: barometric – rules of thumb
Oligopoly • Factors favouring collusion – Few firms – Open with each other – Similar production methods and average costs – Similar products – Dominant firm – Significant entry barriers – Stable market – No government measures to curb collusion
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games
Profits for firms A and B at different prices
X’s price £2.00
B
A £2.00
Y’s price £1.80
£1.80 £5m for Y £12m for X
£10m each
D
C £12m for Y £5m for X
£8m each
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • Nash equilibrium
Profits for firms A and B at different prices
X’s price £2.00
B
A £2.00
Y’s price £1.80
£1.80 £5m for Y £12m for X
£10m each
D
C £12m for Y £5m for X
£8m each
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • Nash equilibrium • the prisoners’ dilemma
The prisoners' dilemma Amanda's alternatives Not confess Not confess
B
A Each gets 1 year
Nigel's alternatives C Nigel gets Confess
Confess
3 months Amanda gets 10 years
Nigel gets 10 years Amanda gets 3 months
D
Each gets 3 years
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games – the importance of threats and promises
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games – the importance of threats and promises – the importance of timing of decisions
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games – the importance of threats and promises – the importance of timing of decisions • decision trees
A decision tree
Airbus 00 se 5 decides 400
sea
ter
50 0
se a
te r
B1
r ate
Boeing decides A
40
0s
ea
te
s 0 0 5
r
B2
Airbus decides
400
r ate
e
sea
Boeing –£10m (1) Airbus –£10m
Boeing +£30m (2) Airbus +£50m
Boeing +£50m (3) Airbus +£30m
ter
Boeing –£10m (4) Airbus –£10m
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model
Kinked demand for a firm under oligopoly £
Current price and quantity give one point on demand curve
P1
O
Q1
Q
Kinked demand for a firm under oligopoly £
D P1
D O
Q1
Q
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices
Stable price under conditions of a kinked demand curve £
MC2 MC1
P1
a
D = AR
b O
Q1
Q
MR
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest – advantages
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest – advantages – disadvantages
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest – advantages – disadvantages – difficulties in drawing general conclusions
Price Discrimination • Meaning of price discrimination – First degree – Second degree – Third degree (the most common form)
Third-degree price discrimination P
Revenue from a single price
P1
D
O
200
Q
Third-degree price discrimination P
Increased revenue from price discrimination A higher discriminatory price is now introduced
P2 P1
D
O
150
200
Q
Price Discrimination • Meaning of price discrimination – First degree – Second degree – Third degree (the most common form)
• Conditions necessary for price discrimination
Price Discrimination • Meaning of price discrimination – First degree – Second degree – Third degree (the most common form)
• Conditions necessary for price discrimination • Advantages to the firm
Price Discrimination • Profit maximising prices and output under price discrimination
Profit-maximising output under third degree price discrimination
DX O
O MRX
(a) Market X
O
Profit-maximising output under third degree price discrimination
DY DX O
MRY O
O
MRX
(a) Market X
(b) Market Y
Profit-maximising output under third degree price discrimination
DY DX O
MRY O
MRT O
MRX
(a) Market X
(b) Market Y
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
DY DX O
MRY O
MRT O
MRX
(a) Market X
(b) Market Y
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
DY DX O
MRY O
O
MRX
(a) Market X
MRT
(b) Market Y
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
5
DY DX
O
MRY O
O
MRX
(a) Market X
MRT
(b) Market Y
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
5
DY DX
O 1000
MRY O
O
MRX
(a) Market X
MRT
(b) Market Y
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
5
DY DX
O 1000
MRY O
MRX
(a) Market X
2000
(b) Market Y
MRT O
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC 9 5
DY DX
O 1000
MRY O
MRX
(a) Market X
2000
(b) Market Y
MRT O
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC 9
7
5
DY DX
O 1000
MRY O
MRX
(a) Market X
2000
(b) Market Y
MRT O
3000
(c) Total (markets X + Y)
Price Discrimination • Profit maximising prices and output under price discrimination • Price discrimination and the public interest – competition
Price Discrimination • Profit maximising prices and output under price discrimination • Price discrimination and the public interest – competition – profits
The Degree of Competition • Classifying markets – number of firms – freedom of entry to industry – nature of product – nature of demand curve
• The four market structures – perfect competition – monopoly – monopolistic competition – oligopoly
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
Features of the four market structures
The Degree of Competition • Classifying markets – number of firms – freedom of entry to industry – nature of product – nature of demand curve
• The four market structures – perfect competition – monopoly – monopolistic competition – oligopoly
• Structure → conduct → performance
Perfect Competition • Assumptions – firms are price takers – freedom of entry – identical products – perfect knowledge
• Short-run equilibrium of the firm – price, output and profit
Short-run equilibrium of industry and firm under perfect competition P
£
MC
S
D = AR = MR
AR AC
Pe
D O
O Q (millions)
(a) Industry
AC
Qe Q (thousands)
(b) Firm
Loss minimising under perfect competition P
£ S
AC P1
AC
MC
D1 = AR1
AR1
= MR1
D O
O Q (millions)
(a) Industry
Qe Q (thousands)
(b) Firm
Perfect Competition • Assumptions – firms are price takers – freedom of entry – identical products – perfect knowledge
• Short-run equilibrium of the firm – price, output and profit
• The short-run supply curve of the firm
Deriving the short-run supply curve
P
£
S
MC = S a
P1 P2
b c
P3
D1 = MR1 D2 = MR2 D3 = MR3
D1 D3 O
Q (millions)
(a) Industry
D2 O
Q (thousands)
(b) Firm
Perfect Competition • Long-run equilibrium of the firm – all supernormal profits competed away – LRAC = AC = MC = MR = AR
Long-run equilibrium under perfect competition Profits return Supernormal New firms enter to normalprofits P
£
S1 Se
LRAC P1
AR1
D1
PL
ARL
DL
D O
O Q (millions)
(a) Industry
QL Q (thousands)
(b) Firm
Long-run equilibrium of the firm under perfect competition £
(SR)MC (SR)AC
LRAC
DL AR = MR
LRAC = (SR)AC = (SR)MC = MR = AR
O
Q
Perfect Competition • Incompatibility of economies of scale with perfect competition • Benefits of perfect competition – price equals marginal cost – prices kept low – firms must be efficient to survive
Monopoly • Defining monopoly • Barriers to entry – economies of scale – economies of scope – product differentiation and brand loyalty – lower costs for an established firm – ownership/control of key factors – ownership/control over outlets – legal protection – mergers and takeovers – aggressive tactics – intimidation
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR
Profit maximising under monopoly £
MC
MR O
Qm
Q
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR – Equilibrium price, found from demand curve
Profit maximising under monopoly £
MC AC
AR
AC
AR MR O
Qm
Q
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR – Equilibrium price, found from demand curve
• Profit – Measuring profit
Profit maximising under monopoly £
MC Total profit
AC
AR
AC
AR MR O
Qm
Q
Monopoly • The monopolist’s demand curve – downward sloping – MR below AR
• Equilibrium price and output – Equilibrium output, where MC = MR – Equilibrium price, found from demand curve
• Profit – Measuring profit – Supernormal profit can persist in long run
Monopoly • Disadvantages of monopoly – high prices / low output: short run
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC
Monopoly P1
AR = D
MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC ( = supply under perfect competition)
Comparison with Perfect competition
P1 P2
AR = D
MR O
Q1
Q2
Q
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly – economies of scale
Equilibrium of industry under perfect competition and monopoly: with different MC curves £
MCmonopoly
P1
AR = D MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with different MC curves MC ( = supply)perfect competition
£
MCmonopoly P2 P1
x
P3
AR = D MR O
Q2
Q1
Q3
Q
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly – economies of scale – profits can be used for investment
Monopoly • Disadvantages of monopoly – high prices / low output: short run – high prices / low output: long run – lack of incentive to innovate – X-inefficiency
• Advantages of monopoly – economies of scale – profits can be used for investment – high profits encourage risk taking
Monopoly • Contestable markets – importance of potential competition – a perfectly contestable market – contestable markets and natural monopolies – importance of costless exit
• Contestable markets and the public interest
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run
Short-run equilibrium of the firm under monopolistic competition £
MC AC
Ps ACs
AR = D MR O
Qs
Q
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run
Long-run equilibrium of the firm under monopolistic competition £
LRMC LRAC PL
ARL = DL MRL O
QL
Q
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
Long run equilibrium of the firm under perfect and monopolistic competition £
LRAC P1 P2
DL under perfect competition
DL under monopolistic competition O
Q1
Q2
Q
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition • The public interest
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition • The public interest – comparison with perfect competition
Monopolistic Competition • Assumptions of monopolistic competition • Equilibrium of the firm – short run – long run – underutilisation of capacity in the long run
• Non-price competition • The public interest – comparison with perfect competition – comparison with monopoly
Oligopoly • Key features of oligopoly – barriers to entry – interdependence of firms
• Competition versus collusion • Collusive oligopoly: cartels – equilibrium of the industry
Profit-maximising cartel £
Industry D = AR O
Q
Profit-maximising cartel £
Industry MC P1
Industry D = AR Industry MR O
Q1
Q
Oligopoly • Key features of oligopoly – barriers to entry – interdependence of firms
• Competition versus collusion • Collusive oligopoly: cartels – equilibrium of the industry – allocating and enforcing quotas
Oil prices
$ per barrel
Actual price
35 Iraq invades Iran
30
OPEC’s first quotas Iraq invades Kuwait
Revolution in Iran
25 20
Impending war with Iraq
World-wide recovery
First oil from North Sea World-wide slowdown
15 10
Cease-fire in Iran-Iraq war
New OPEC quotas
86
92
Recession in Far East
Yom Kippur War: Arab oil embargo
5 0 70
72
74
76
78
80
82
84
88
90
94
96
98
00
02
Oil prices
$ per barrel
Actual price Cost in 1973 prices
35 Iraq invades Iran
30
OPEC’s first quotas Iraq invades Kuwait
Revolution in Iran
25 20
Impending war with Iraq
World-wide recovery
First oil from North Sea World-wide slowdown
15 10
Cease-fire in Iran-Iraq war
New OPEC quotas
86
92
Recession in Far East
Yom Kippur War: Arab oil embargo
5 0 70
72
74
76
78
80
82
84
88
90
94
96
98
00
02
Oligopoly • Tacit collusion – price leadership: dominant firm
Price leader aiming to maximise profits for a given market share £
Assume constant market share for leader
AR = D market
AR = D leader MR leader O
Q
Price leader aiming to maximise profits for a given market share £
MC
PL
l
t AR = D market
AR = D leader MR leader O
QL
QT
Q
Oligopoly • Tacit collusion – price leadership: dominant firm – price leadership: barometric
Oligopoly • Tacit collusion – price leadership: dominant firm – price leadership: barometric – rules of thumb
Oligopoly • Factors favouring collusion – Few firms – Open with each other – Similar production methods and average costs – Similar products – Dominant firm – Significant entry barriers – Stable market – No government measures to curb collusion
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games
Profits for firms A and B at different prices
X’s price £2.00
B
A £2.00
Y’s price £1.80
£1.80 £5m for Y £12m for X
£10m each
D
C £12m for Y £5m for X
£8m each
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • Nash equilibrium
Profits for firms A and B at different prices
X’s price £2.00
B
A £2.00
Y’s price £1.80
£1.80 £5m for Y £12m for X
£10m each
D
C £12m for Y £5m for X
£8m each
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • Nash equilibrium • the prisoners’ dilemma
The prisoners' dilemma Amanda's alternatives Not confess Not confess
B
A Each gets 1 year
Nigel's alternatives C Nigel gets Confess
Confess
3 months Amanda gets 10 years
Nigel gets 10 years Amanda gets 3 months
D
Each gets 3 years
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games – the importance of threats and promises
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games – the importance of threats and promises – the importance of timing of decisions
Oligopoly • The breakdown of collusion • Non-collusive oligopoly: game theory – alternative strategies • maximax and maximin
– simple dominant strategy games • the prisoners’ dilemma • Nash equilibrium
– more complex non-dominant strategy games – the importance of threats and promises – the importance of timing of decisions • decision trees
A decision tree
Airbus 00 se 5 decides 400
sea
ter
50 0
se a
te r
B1
r ate
Boeing decides A
40
0s
ea
te
s 0 0 5
r
B2
Airbus decides
400
r ate
e
sea
Boeing –£10m (1) Airbus –£10m
Boeing +£30m (2) Airbus +£50m
Boeing +£50m (3) Airbus +£30m
ter
Boeing –£10m (4) Airbus –£10m
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model
Kinked demand for a firm under oligopoly £
Current price and quantity give one point on demand curve
P1
O
Q1
Q
Kinked demand for a firm under oligopoly £
D P1
D O
Q1
Q
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices
Stable price under conditions of a kinked demand curve £
MC2 MC1
P1
a
D = AR
b O
Q1
Q
MR
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest – advantages
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest – advantages – disadvantages
Oligopoly • Non-collusive oligopoly: the kinked demand curve theory – assumptions of the model – stable prices – limitations of the model
• Oligopoly and the public interest – advantages – disadvantages – difficulties in drawing general conclusions
Price Discrimination • Meaning of price discrimination – First degree – Second degree – Third degree (the most common form)
Third-degree price discrimination P
Revenue from a single price
P1
D
O
200
Q
Third-degree price discrimination P
Increased revenue from price discrimination A higher discriminatory price is now introduced
P2 P1
D
O
150
200
Q
Price Discrimination • Meaning of price discrimination – First degree – Second degree – Third degree (the most common form)
• Conditions necessary for price discrimination
Price Discrimination • Meaning of price discrimination – First degree – Second degree – Third degree (the most common form)
• Conditions necessary for price discrimination • Advantages to the firm
Price Discrimination • Profit maximising prices and output under price discrimination
Profit-maximising output under third degree price discrimination
DX O
O MRX
(a) Market X
O
Profit-maximising output under third degree price discrimination
DY DX O
MRY O
O
MRX
(a) Market X
(b) Market Y
Profit-maximising output under third degree price discrimination
DY DX O
MRY O
MRT O
MRX
(a) Market X
(b) Market Y
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
DY DX O
MRY O
MRT O
MRX
(a) Market X
(b) Market Y
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
DY DX O
MRY O
O
MRX
(a) Market X
MRT
(b) Market Y
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
5
DY DX
O
MRY O
O
MRX
(a) Market X
MRT
(b) Market Y
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
5
DY DX
O 1000
MRY O
O
MRX
(a) Market X
MRT
(b) Market Y
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC
5
DY DX
O 1000
MRY O
MRX
(a) Market X
2000
(b) Market Y
MRT O
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC 9 5
DY DX
O 1000
MRY O
MRX
(a) Market X
2000
(b) Market Y
MRT O
3000
(c) Total (markets X + Y)
Profit-maximising output under third degree price discrimination MC 9
7
5
DY DX
O 1000
MRY O
MRX
(a) Market X
2000
(b) Market Y
MRT O
3000
(c) Total (markets X + Y)
Price Discrimination • Profit maximising prices and output under price discrimination • Price discrimination and the public interest – competition
Price Discrimination • Profit maximising prices and output under price discrimination • Price discrimination and the public interest – competition – profits
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