Downloaded 49 times
Uploaded byMithilesh Trivedi
Oligopoly Competition Pricing, and Different Models
This document discusses pricing strategies in oligopolistic markets. It begins by defining key terms like oligopoly and barriers to entry. It then discusses three main models of oligopoly pricing: 1) Cooperative vs non-cooperative behavior, where firms must decide whether to set prices jointly or compete separately. 2) Game theory, which models pricing as a strategic interaction where each firm's best decision depends on the other's actions. 3) Specific models like Cournot competition, where firms choose quantities, and the kinked demand curve model of price leadership. Real-world examples of oligopolies discussed include airlines and car manufacturers. The document analyzes how various factors influence pricing under imperfect
More Related Content
Similar to Oligopoly Competition Pricing, and Different Models
Oligopoly Competition Pricing, and Different Models
- 2. Less Price IsAlways Wise Mithilesh C mpetition lig poly • Pricing • Cooperative vs. Non-cooperative Behaviour • Game Theory • Cournot’s Model • Kinked Demand Curve
- 3. A market inwhich a two-three large sellers control most of the production of a good or service and they work together on setting prices ligopoly S e l l e r s A r e R u l e r s
- 4. Conditions of anOligopoly a. Very few Sellers that control the entire market b. Products may be differentiated or identical (but they are usually standardized) c. Medium barriers to entry: Difficult to Enter the market because the competitors work together to control all the resources & prices d. The actions of one affects all the producers e. Collusion = an agreement to act together or behave in a cooperative manner More Competition Less Competition
- 5. BARRIERS Structural Barriers • Highcapital cost • Economies of scale • Product differentiation and brand loyalty • High switching cost • Ownership/control of key factors or outlets Institutional Barriers • Patents • Regulations Strategic Barriers • Limit pricing • Excess capacity • Vertical integration • Sleeping patents • Predatory pricing • Tying sales
- 6.
- 7. Pricing (administered) InOligopoly • Rigid oligopoly prices, often referred to as “administered” prices • Administered prices have generally been defined as those prices arrived at within the firm as an integral part of its decision-making process, as distinguished from those generated entirely by the impersonal interplay of market forces. Nearly all prices communicated to the public through published price lists are administered. • But the oligopolistic prices contributing to the postwar inflation have been relatively few, confined principally to highly concentrated industries that deal with strong labor unions.
- 8. Cooperative vs. Non-cooperativeBehaviour In Oligopoly The basic dilemma • CO-OPERATIVE BEHAVIOUR: - in oligopoly is a situation when firms jointly decide the prices and output and maximizes their joint profit. This situation is called collusion, in this situation it becomes profitable for one firm if it defects and cuts the prices and rises output, • NON- COOPERATIVE BEHAVIOUR: - is a situation when they do not co-operate and decides their prices and output separately and compete with each other. When firms in oligopoly do not co-operate it is called non- cooperative equilibrium or Nash equilibrium In oligopoly the basic dilemma the firms face is whether to co- operate or to compete. If they co-operate profit will be maximum and if they do not profit for all will decrease Dilemma
- 9. Oligopoly Pricing ThroughGame Strategic Behaviour • Strategic behavior is the behavior that occurs when what is best for A depends upon what B does, and what is best for B depends upon what A does • Strategic behavior has been analyzed using the mathematical techniques of game theory • Game theory provides a description of oligopolistic behavior as a series of strategic moves and countermoves GAME THEORY: - It is a mathematical theory that is used for the analysis and resolution of conflict situations in which parties have opposing interests. The concepts of game theory provide a tool for formulating, analyzing and understanding different strategies. It attempts to address the functional relationship between the selected strategies of individual players and their market outcome, which may be either profit or loss.
- 10. For each companythe possibility of playing either with a high or a low price is available, while the demand for the product of a company depends not only on its chosen strategy, but also on the strategy chosen by the opponent. A change in demand will lead to changes in profits. If a company increases the price, and the other retains a lower price, then the first company loses a part of the profits, because it loses part of its market, whereas another company increases its market share and profits.
- 11. Oligopoly Pricing UnderSpecific Assumption Cournot’s Model Cournot competition is one where firms simultaneously choose their optimal quantity produced instead of prices. The manner in which we derive a solution is through examining what the best strategy each has given their believes in what their competition would do. The assumptions for Model: 1. There are two firms (though the problem can be generalized to the multiple firm Case) 2. Firms produce a homogenous product. 3. Firms choose optimal quantity produced simultaneously. 4. Marginal Cost of production are the same for both firms.
- 12. Kinked Demand Curveand Price Leadership model
- 13.
- 14.