1. Managerial Economics in a Global Economy
Oligopoly
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

2. Oligopoly Few sellers of a product Nonprice competition
Barriers to entry
Duopoly - Two sellers
Pure oligopoly - Homogeneous product
Differentiated oligopoly - Differentiated product
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

3. Sources of Oligopoly Economies of scale
Large capital investment required
Patented production processes
Brand loyalty
Control of a raw material or resource
Government franchise
Limit pricing
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

4. Measures of Oligopoly Concentration Ratios Herfindahl Index (H)
4, 8, or 12 largest firms in an industry
Herfindahl Index (H)
H = Sum of the squared market shares of all firms in an industry
Theory of Contestable Markets
If entry is absolutely free and exit is entirely costless then firms will operate as if they are perfectly competitive
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

5. Kinked Demand Curve Model
Proposed by Paul Sweezy
If an oligopolist raises price, other firms will not follow, so demand will be elastic
If an oligopolist lowers price, other firms will follow, so demand will be inelastic
Implication is that demand curve will be kinked, MR will have a discontinuity, and oligopolists will not change price when marginal cost changes
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

6. Kinked Demand Curve Model
P MC’
P K MC
P MC”
Q2 Q Q3
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

7. Kinked Demand Curve Model
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

8. Cartels Collusion Market-Sharing Cartel Centralized Cartel
Cooperation among firms to restrict competition in order to increase profits
Market-Sharing Cartel
Collusion to divide up markets
Centralized Cartel
Formal agreement among member firms to set a monopoly price and restrict output
Incentive to cheat
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

9. Centralized Cartel
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

10. Kartel yang terdiri atas 2 perusahaan mengahadapi fungsi permintaan sbb: Q = 120 – 10P, atau P = 12 – 0.1Q Fungsi biaya masing-masing perusahaan adalah: TC1 = 4Q Q12 TC2 = 2Q Q22. a. Tentukan harga monopolinya. B. Berapa Q yang harus dproduksi oleh masing-masing perusahaan?
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

11. Kartel yang terdiri atas 2 perusahaan mengahadapi fungsi permintaan sbb: Q = 120 – 10P, atau P = 12 – 0.1Q Fungsi biaya masing-masing perusahaan adalah: Cari MR, MC1, MC2, ƩMC TR = PQ = (12-0.1Q)Q= 12Q – 0.1Q2 MR = 12 – 0.2Q MC1 = Q1 Q1= MC1 MC2 = Q2 Q2= MC2 ƩMC = MC1 + MC2Q = ƩMC ƩMC = Q ƩMC = (30 + Q)/10 = Q MR = ƩMC 12 – 0.2Q = Q Q = Q = 9/0.3 = P = Q = 12 – 0.1*30 = 9
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

12. MR = 12 – 0. 2Q = 12 – 0. 2. 30 = 6 Q1MC1 = MR; 4 + 0. 2Q = 60
MR = 12 – 0.2Q = 12 – 0.2 * 30 = 6 Q1MC1 = MR; Q = 60.2Q = 6-4=2Q = 2/0.2=10 Q2MC2 = MR; Q = 60.2Q = 6-2=4Q = 4/0.2=20 LABA: Perusahaan 1. AC1 = Q = *10 = 4 +1 = 5 TC = AC * Q = 5 *10 = 50 TR = P*Q = 9*10 = 90 Laba = TR – TC = =40 Perusahaan 1. AC2 = Q = *20 = = 4 TC = AC * Q = 4 *20 = 80 TR = P*Q = 9*20 = 180 Laba = TR – TC = =100
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

13. Price Leadership Implicit Collusion Price Leader (Barometric Firm)
Largest, dominant, or lowest cost firm in the industry
Demand curve is defined as the market demand curve less supply by the followers
Followers
Take market price as given and behave as perfect competitors
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

14. Price Leadership
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

15. Harmful Effects of Oligopoly
Price is usually greater then long-run average cost (LAC)
Quantity produced usually does correspond to minimum LAC
Price is usually greater than long-run marginal cost (LMC)
When a differentiated product is produced, too much may be spent on advertising and model changes
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

16. Sales Maximization Model
Proposed by William Baumol
Managers seek to maximize sales, after ensuring that an adequate rate of return has been earned, rather than to maximize profits
Sales (or total revenue, TR) will be at a maximum when the firm produces a quantity that sets marginal revenue equal to zero (MR = 0)
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.

17. Sales Maximization Model
MR = 0 where Q = 50
MR = MC where Q = 40
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.