Transcript Oligopoly Models

Quasi-Competitive Model
• A model of oligopoly pricing in which each
firm acts as a price taker even though
there may be few firms is a quasicompetitive model.
• As a price taker, a firm will produce where
price equals long-run marginal costs.
• This equilibrium will resemble the perfectly
competitive solution, even with few firms.
P
P
P
MC
MC
D1
Firm 1
MC
DIND
D2
Firm 2
Industry
Quasi Competitive Model
Industry
Price
P
C
C
MC
D
MR
0
Q
C
Quantity
per week
Cartel Model
• Firms collude on price and/or quantities
• They act as if they are a monopoly
• They set an industry price where MRi =
MCi
• The cartel model is not efficient
• Side payments are necessary to equalize
profit
Cartel Model
• Maintaining this cartel solution poses three
problems:
– Cartel formations may be illegal, as it is in the
U.S. by Section I of the Sherman Act of 1890.
– It requires a considerable amount of costly
information be available to the cartel.
• The market demand function.
• Each firm’s marginal cost function.
Cartel Problems
•
•
•
•
Illegal in the U.S.
Side Payments are difficult
Incentives to Cheat
Relationships between members is
complex
Cartel Model
• A model of pricing in which firms
coordinate their decisions to act as a
multiplant monopoly is the cartel model.
• Assuming marginal costs are constant and
equal across firms, the cartel output is
point M
• The plan would require a certain output by
each firm and how to share the monopoly
profits.
Cartel Model
P
Industry
MCi=SMC1+MC2
P
MC1
Firms
MC2
Pi
MRi
Qi
MRi=SMC1+MC2
Companies unite to
maximizes industry profit
Di
MRi
Q
Q1 Q2
Di
Q
Cartel Model
Price
P
P
P
M
M
A
A
C
C
MC
D
MR
0
Q
M
Q
A
Q
C
Quantity
per week
Formal Model of
Price Leadership Model
Price
SC
P1
D’
P
P
L
2
MC
MR’
0
Q
C
Q Q
L
T
D
Quantity
per week