14 Is the U.S. becoming more Oligopolistic? Answer appears to be NO to this question. While there have been some periods of time when industries appeared to be getting more concentrated into fewer firms, there are other periods of history where just the opposite happened.
24 Firms in Oligopoly are said to be Mutually Interdependent Firms realize the large impact that other firms behavior has on their profitsLeads to many models of oligopoly, depending on how the firms deal with the mutual interdependence issue
25 One way to deal with the Mutual Interdependence problem is….. LET’S CHEAT!!!!THE COLLUSION SOLUTION!!!
28 One model of collusion that can be used is the cartel model Internationally, some cartels like OPEC existDomestically, these would be illegalIf the cartel can collude perfectly, would tend to charge the monopoly price
29 Ingredients for a successful cartel Control a large share of the marketInelastic and stable demand for the productSimilar costs among cartel membersFairly homogenous productFew number of firmsWays of preventing cheating on the agreement
32 Kinked demand curve model of oligopoly: assumption, rivals will match all price cuts but not price increases. Under this assumption, its as if each firm faces a “kinked” demand curve, with 2 sections to it: more elastic above the existing price, since rivals won’t match a price increase, and less elastic below the existing price, since rivals quickly match price cuts.
34 Graph explanation: Let P1 and Q1 be the existing price and quantity for this oligopoly firm: due to the assumptions of this model, the demand curve has a kink in it at this price and output. Because of the strange shape of the demand curve, the MR curve is discontinuous, or has a gap in it.
35 Kinked demand curve model is an attempt to explain rigid prices in oligopoly: That is, firms might not change price very often. Why? Firm is reluctant to raise price if its competitors do not, since it could lose sales to them, and little reason is seen to lower price if competitors quickly match the price cut, since little will be gained.
38 Price leadership in Oligopoly One firm, the dominant firm, sets the price, others follow the leaderOften the dominant firm is the low cost producer in the industryIs this a form of “tacit” collusion?
44 If the 2 people could collude, would likely choose to not confess, but self interest may drive each to confess, hoping the other does not, end up both confessing, worse off for both—many similar situations perhaps for firms in oligopoly
46 What is a dominant strategy? A strategy that is best regardless of what the opposition does. For B, dominant strategy is to break the agreement, and also for A. Both firms avoid the worst case scenario in this manner.
47 What is a Nash equilibrium What is a Nash equilibrium? (named for Mathematician John Nash…did you see the film “A Beautiful Mind?)A situation where neither firm can improve its payoff, given what the other firm is doing…in this example, breaking the agreement is the Nash equilibrium
48 Is there any way to get to box 1 where both firms are better off short of outright collusion? Possibility of a tit-for-tat strategy….somehow indicate to the other firm that although you want to hold the agreement, you will switch to match what the other firm does.