Models of oligopoly

TRINITY INSTITUTE OF PROFESSIONAL STUDIES

Sector – 9, Dwarka Institutional Area, New Delhi-75Affiliated Institution of G.G.S.IP.U, Delhi

Models Of OligopolyB.Com (H) 3rd SemesterSubject Code #888205

Jyoti Saini

TRINITY INSTITUTE OF PROFESSIONAL STUDIESSector – 9, Dwarka Institutional Area, New Delhi-75

Models of Oligopoly

• Cournot’s duopoly model• Sweezy’s kinked demand curve model• Price leadership models• Collusive models :The Cartel Arrangement• The Game Theory • Prisoner’s Dilemma


Cournot’s duopoly modelAntoine Augustin Cournot was a French philosopher and mathematician. Antoine Augustin Cournot was born at Gray

In 1838 the book Researches on the Mathematical Principles of the Theory of Wealth was published, in which he used the application of the formulas and symbols of mathematics in economic analysis


Cournot’s duopoly model

ASSUMPTIONThere are two firms each owning an artesian mineral

water well.Both the firms operate their wells at zero marginal costBoth of them face a demand curve with constant

negative slopeEach seller acts on the assumption that his competitor

will not react to his decision to change his output and price


•


Cournot’s duopoly model

Criticism• Wrong calculation about competitor’s

behavior• Zero cost of production


Sweezy’s kinked demand curve model

• "Kinked" demand curves and traditional demand curves are similar in that they are both downward-sloping. They are distinguished by a hypothesized concave bend with a discontinuity at the bend - the "kink." Therefore, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve.

http://en.wikipedia.org/wiki/Demand_curve

http://en.wikipedia.org/wiki/Discontinuity_(mathematics)

http://en.wikipedia.org/wiki/Jump_discontinuity

http://en.wikipedia.org/wiki/Marginal_revenue


• Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity.



• The kinked demand analysis only suggests why prices remain sticky

• Only explain the stability of output and price• Price stability does not stand the test of

empirical verification


Price leadership Model

• The firms in the oligopolistic market are not happy with price competition among themselves. They try various methods to maximize joint profits. Price leadership is one of the means which provides relief to the firms from the strains of price competition.

• The firms in the oligopolistic industry (without any formal agreement) accept the price set by the leading firm in the industry and move their prices in line with the prices of the leader firm. The acceptance of price set by the price leader firm maximizes the total profits of each firm in the oligopolistic industry.


Assumptions

The main assumptions of price leadership model under oligopoly are as under.

(1) There are two firms A and B in the market.

(2) The output produced by the two firms is homogeneous.

(3) The firm A being the low cost firm or a dominant firm acts as a leader firm.

(4) Both of the firms face the same demand curve

(5) Each of the two firms has an equal share in the market. The price and output determination under price leadership


Price leadership Model

A. Price leadership by low-Cost firmB. Price leadership By a Dominate FirmC. The Barometric leadership

CriticismProblem in pricing and outputAcceptance of small firms


Collusive models The Cartel Arrangement

• A cartel is a formal (explicit) "agreement" among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production.

• Cartels usually occur in an oligopolistic industry, where the number of sellers is small (usually because barriers to entry, most notably startup costs, are high) and the products being traded are usually homogeneous.

.


Collusive models The Cartel Arrangement

Barriers• The number of firms: As the number of firms

in an industry increases, it is more difficult to successfully organize.

• Cost and demand differences between firms.• Economic recession: An increase in average

total cost or a decrease in revenue


The Game Theory • The classical models of strategic action and reaction• The cartel system of price and output determination.• Game theory – a mathematical technique to show oligopoly

firms play their games/The nature of the problem

Prisoners dilemmaTwo person A and B – match fixing- arrested by CBI. If both confess they ill get 5yr imprisoned If both denies will be free If one confesses & turn approver get 2yr and other gets 10 yr


A B

Confess Deny

Confess

Deny

A’s Option

B’s Option


THANK YOU

Education

Models of oligopoly