Oligopoly ! !!!! 2012–2013 Firm - economics toolbox lecture 12 h1.pdfKinked demand curve may...
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economics micro ECON1527 [Micro] • 2012-13 ECON1527 2012–2013 Economics [Micro] John Powell 12. Theory of the firm – Market structures 4 for references and resources see www.economicstoolbox.com 1 economics micro ECON1527 [Micro] • 2012-13 Outline ! Oligopoly – Introduction – Structural characteristics – Example industry – supermarkets – Kinked demand curve Reading Sloman et al (2012), ch 7 Binmore and Klemperer (2001) 2 economics micro Introduction ! Oligopoly ʻtheoryʼ is unique in the ʻTheory of the Firmʼ, given its characteristics, as a variety of possible market contexts exist with oligopoly ! Consequently, several authorsʼ work still stands as forming a collection of co-existing models of oligopoly eg: – Cournot (1838) and Bertrand (1883) models of duopoly – Sweezy and Hall and Hitch models of kinked demand (both 1939) – Use of game theory – Stackelberg (1934) – Plus application of more orthodox models to collusion (eg cartels) and competition (price wars) ECON1527 [Micro] • 2012-13 3 economics micro Defining… [print] Remember: Structure " Conduct " Performance + feedback loops ECON1527 [Micro] • 2012-13 5 Most Least Perfect competition Monopolistic competition Oligopoly Monopoly Many firms Lots of firms Few firms One firm no entry barriers no entry barriers entry barriers entry barriers Identical products Differentiated products Identical or differentiated Unique ʻimperfect competitionʼ see Sloman et al (2012:173) economics micro Oligopoly Key structural characteristics (Sloman et al, 2012:197-205) ! ʻFewʼ firms, sharing a large proportion of the market – Concentration ratio eg CR 4 , CR 5 ! Barriers to entry (similar to monopoly) – eg mobile phone networks in UK are licensed by Ofcom – only 5 licenses for 3G spectrum see Binmore and Klemperer (2001) ! Interdependence of firms – Unique aspect of oligopoly – Firms will assess and predict rivalsʼ conduct – Outcome is uncertainty – both for firm and models (hence no single theory of oligopoly) ECON1527 [Micro] • 2012-13 6 economics micro Oligopoly Key structural characteristics (Sloman et al, 2012:197-205) ! Given interdependence, firms may choose to compete or collude – Pressures upon firm in either case are contradictory ! In part, this may depend on whether firms are selling identical or differentiated products ECON1527 [Micro] • 2012-13 7 economics micro Oligopoly Example industry: Supermarkets ! Dominated by four main rivals, with a number of somewhat smaller firms ! Concerns over impact on retail environment eg see Harris (2012) ECON1527 [Micro] • 2012-13 8 Wachman (2012) economics micro Oligopoly Example industry: Supermarkets Collusion vs competition ECON1527 [Micro] • 2012-13 10 economics micro Oligopoly Example industry: Supermarkets Location, location, location ECON1527 [Micro] • 2012-13 15
Transcript of Oligopoly ! !!!! 2012–2013 Firm - economics toolbox lecture 12 h1.pdfKinked demand curve may...
economics!
micro!ECON1527 [Micro] • 2012-13!
!ECON1527! ! ! ! !2012–2013!Economics [Micro]!John Powell!!!12. Theory of the firm
!– Market structures 4!!!!for references and resources see!www.economicstoolbox.com!!
1!
economics!
micro!ECON1527 [Micro] • 2012-13!
Outline!! Oligopoly!
– Introduction!– Structural characteristics!– Example industry – supermarkets!– Kinked demand curve!
Reading!Sloman et al (2012), ch 7!Binmore and Klemperer (2001)!!
!
2!
economics!
micro!
Introduction!
! Oligopoly ʻtheoryʼ is unique in the ʻTheory of the Firmʼ, given its characteristics, as a variety of possible market contexts exist with oligopoly!
! Consequently, several authorsʼ work still stands as forming a collection of co-existing models of oligopoly eg:!– Cournot (1838) and Bertrand (1883) models of
duopoly!– Sweezy and Hall and Hitch models of kinked
demand (both 1939)!– Use of game theory – Stackelberg (1934)!– Plus application of more orthodox models to
collusion (eg cartels) and competition (price wars)!
ECON1527 [Micro] • 2012-13! 3!
economics!
micro!
Defining… [print] !
Remember:!!Structure " Conduct " Performance!
+ feedback loops!!
ECON1527 [Micro] • 2012-13! 5!
Most! Least!Perfect
competition!Monopolistic competition!
Oligopoly! Monopoly!
Many firms! Lots of firms! Few firms! One firm!no entry barriers! no entry barriers! entry barriers! entry barriers!
Identical products!
Differentiated products!
Identical or differentiated!
Unique!
ʻimperfect competition!̓see
Sloman et al (2012:173)!
economics!
micro!
Oligopoly!
Key structural characteristics !(Sloman et al, 2012:197-205)!! ʻFewʼ firms, sharing a large proportion of the market!
– Concentration ratio eg CR4, CR5!! Barriers to entry (similar to monopoly)!
– eg mobile phone networks in UK are licensed by Ofcom – only 5 licenses for 3G spectrum see Binmore and Klemperer (2001) !
! Interdependence of firms!– Unique aspect of oligopoly!– Firms will assess and predict rivalsʼ conduct!– Outcome is uncertainty – both for firm and models
(hence no single theory of oligopoly)!
ECON1527 [Micro] • 2012-13! 6!
economics!
micro!
Oligopoly!
Key structural characteristics !(Sloman et al, 2012:197-205)!! Given interdependence, firms may choose to
compete or collude!– Pressures upon firm in either case are contradictory!
! In part, this may depend on whether firms are selling identical or differentiated products!
ECON1527 [Micro] • 2012-13! 7!
economics!
micro!
Oligopoly!
Example industry: Supermarkets!!! Dominated by four main
rivals, with a number ofsomewhat smaller firms!
! Concerns over impacton retail environmenteg see Harris (2012)!
!
ECON1527 [Micro] • 2012-13! 8!
Wachman (2012)!
economics!
micro!
Oligopoly!
Example industry: Supermarkets!Collusion vs competition!!!
ECON1527 [Micro] • 2012-13! 10!
economics!
micro!
Oligopoly!
Example industry: Supermarkets!Location, location, location!!!
ECON1527 [Micro] • 2012-13! 15!
economics!
micro!
Non-collusive oligopoly!
ECON1527 [Micro] • 2012-13! 17!
The kinked demand curve (Sloman et al, 2012:206-209)!!! Hall and Hitchʼs
kinked demand curve emerged fromthe observation of price stabilityin oligopolisticmarkets, even if costs rose.!
! Start with the prevailing price…!
!
economics!
micro!
Non-collusive oligopoly!
The kinked demand curve (Sloman et al, 2012:206-209)!!! Significance of
interdependence…!! Firm will make
assumptions aboutrivalsʼ reactions if the firm alters itsprice!
!
ECON1527 [Micro] • 2012-13! 18!
If the firm raises price, it assumes rivals wonʼt match it!– faces relatively inelastic demand!
economics!
micro!
Non-collusive oligopoly!
The kinked demand curve (Sloman et al, 2012:xxx)!!! If the firm lowers
its price, it expectsrivals to match anyreductions!
! Effectively, a price war would emerge!
!
ECON1527 [Micro] • 2012-13! 19!
With a price reduction the firm faces relatively inelastic demand!
economics!
micro!
Non-collusive oligopoly!
The kinked demand curve (Sloman et al, 2012:xxx)!!! Combining the
two assumptions produces a kinked demand curve!
!
ECON1527 [Micro] • 2012-13! 20!
economics!
micro!
Non-collusive oligopoly!
The kinked demand curve (Sloman et al, 2012:206-209)!!! Marginal Revenue
is discontinuous, because of the two differentdemand curves!
!
ECON1527 [Micro] • 2012-13! 21!
Discontinuity in MR!
economics!
micro!
Non-collusive oligopoly!
ECON1527 [Micro] • 2012-13! 22!
The kinked demand curve (Sloman et al, 2012:206-209)!!! Marginal Revenue
is discontinuous, because of the two differentdemand curves!
! Consequently, Marginal Costscan increase without altering the output level!
!!
economics!
micro!
Review!
! Complexity of oligopoly!! Significance given the frequency with which it
is found!! Kinked demand curve may rationalise price stability but
does not explain how a market may tip into a price war or collusion!
! Next … collusive oligopoly!
ECON1527 [Micro] • 2012-13! 23!
