1. Oligopoly Graphs

2. There are 3 types of Oligopolies
Because firms are interdependent
There are 3 types of Oligopolies
1. Price Leadership (no graph)
2. Colluding Oligopoly
3. Non Colluding Oligopoly

3. #1. Price Leadership

4. Example: Small Town Gas Stations
To maximize profit what will they do?
OPEC does this with OIL

5. Price Leadership Collusion is ILLEGAL. Firms CANNOT set prices.
Price leadership is a strategy used by firms to coordinate prices without outright collusion
General Process:
“Dominant firm” initiates a price change
Other firms follow the leader

6. Price Leadership Breakdowns in Price Leadership
Temporary Price Wars may occur if other firms don’t follow price increases of dominant firm.
Each firm tries to undercut each other.
Example: Employee Pricing

7. #2. Colluding Oligopolies

8. Cartel = Colluding Oligopoly
A cartel is a group of producers that create an agreement to fix prices high.
Cartels set price and output at an agreed upon level
Firms require identical or highly similar demand and costs
Cartel must have a way to punish cheaters
Together they act as a monopoly

9. Firms in a colluding oligopoly act as a monopoly and share the profitMC
ATC D MR Q

10. #3. Non-Colluding Oligopolies

11. Kinked Demand Curve Model
The kinked demand curve model shows how non-collusive firms are interdependent
If firms are NOT colluding they are likely to react to competitor’s pricing in two ways:
Match price-If one firm cuts it’s prices, then the other firms follow suit causing inelastic demand
Ignore change-If one firm raises prices, others maintain same price causing elastic demand

12. If this firm increases it’s price, other firms will ignore it and keep prices the same
As the only firm with high prices, Qd for this firm will decrease a lot P
Elastic P1 Pe D Q1 Qe Q

13. If this firm decreases it’s price, other firms will match it and lower their prices
Since all firms have lower prices, Qd for this firm will increase only a little P
Elastic P1 Pe
Inelastic P2 D Q1 Qe Q2 Q

14. Where is Marginal Revenue?
MR has a vertical gap at the kink. The result is that MC can move and Qe won’t change. Price is sticky. P MC Pe MR D Qe Q

15. Market Structures Venn Diagram

16. Perfect Competition
Monopolistic Competition
No Similarities
Oligopoly
Monopoly

17. Name the market structure(s) that it is associated with each concept
Price Maker (Demand > MR)
Collusion/Cartels
Identical Products
Price Taker (Demand = MR)
Excess Capacity
Low Barriers to Entry
Game Theory
Differentiated Products
Long-run Profits
Efficiency
No long run profit
Dead Weight Loss
High Barriers to Entry
Firm = Industry
MR=MC Rule
1000s of firms
Inefficient
Cost Curves (ATC, AVC, MC, etc)
Motivation for profit
Excess advertising (the most)
100s of firms
Shut down point
Allocative Efficiency
Productively Efficiency
Unique Good
10 or less firms
1 firm

18. Avocados T.J. Hammocks Retail Stores Local Utilities
Identical Products
No advantage
D=MR=AR=P
Both efficiencies
Price-Taker
1000s
Avocados
T.J. Hammocks
Perfect Competition
Monopolistic Competition
Retail Stores
Excess Advertising
Differentiated Products
Excess Capacity
More Elastic Demand than Monopoly
100s
Low barriers to entry
No Long-Run Profit
Price = ATC
MR = MC
Shut-Down Point
Cost Curves
Motivation for Profit
Price Maker (D>MR)
Some Non-Price Competition
Inefficient
No Similarities
Collusion
Strategic Pricing (Interdependence)
Game Theory
10 or less
Price Maker (D>MR)
High Barriers
Ability to Make LR Profit
Inefficient
Unique Good
Price Discrimination 1
Appliances
Cars
Local Utilities
Oligopoly
Monopoly