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Managerial Economics in a Global Economy Oligopoly PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division.

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Presentation on theme: "Managerial Economics in a Global Economy Oligopoly PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division."— Presentation transcript:

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 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 2 MC’ P 1 K MC P 3 MC” 0 Q 2 Q 1 Q 3 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 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: TC 1 = 4Q 1 + 0.1Q 1 2 TC 2 = 2Q 2 + 0.1 Q 2 2. 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, Ʃ MC TR = PQ = (12-0.1Q)Q= 12Q – 0.1Q 2 MR = 12 – 0.2Q MC 1 = 4 + 0.2Q 1  Q 1 = -20 + 5MC 1 MC 2 = 2 + 0.2Q 2  Q 2 = -10 + 5MC 2 Ʃ MC = MC1 + MC2  Q = -30 + 10 Ʃ MC 10 Ʃ MC = 30 + Q Ʃ MC = (30 + Q)/10 = 3 + 0.1Q MR = Ʃ MC  12 – 0.2Q = 3 + 0.1Q 0.3Q = 9 Q = 9/0.3 =30 P = 12- 0.1Q = 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 Q 1  MC 1 = MR; 4 + 0.2Q = 6  0.2Q = 6-4=2  Q = 2/0.2=10 Q 2  MC 2 = MR; 2 + 0.2Q = 6  0.2Q = 6-2=4  Q = 4/0.2=20 LABA: Perusahaan 1. AC 1 = 4 + 0.1Q = 4 +0.1*10 = 4 +1 = 5  TC = AC * Q = 5 *10 = 50  TR = P*Q = 9*10 = 90  Laba = TR – TC = 90 -50 =40 Perusahaan 1. AC 2 = 2 + 0.1Q = 2 + 0.1*20 = 2 + 2 = 4  TC = AC * Q = 4 *20 = 80  TR = P*Q = 9*20 = 180  Laba = TR – TC = 180 -80 =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.


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