Principles of Economics
2nd edition
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
©1999 South-Western College Publishing
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Chapter 12
Price and Output
Determination Under
Oligopoly
7/28/2017
©1999 South-Western College Publishing
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This chapter discusses
principles associated with
The
Balanced
Horizontal,
Concentration
and
Vertical,
Unbalanced
Ratio
and
and
Price
Game
Discrimination
Theory
Kinked
Brand
Price
Demand
Multiplication
Cartels
Leadership
Curve
Herfindahl-Hirschman
Conglomerate
Oligopoly
Mergers
Index
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What is Oligopoly?
A market structure
consisting of only a few
firms producing goods
that are close substitutes
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What are some examples
of Oligopoly?
Automobiles
Steel
Soup
Cereals
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What determines if a
market is an Oligopoly?
The concentration ratio
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What concentration ratio
constitutes an Oligopoly?
There is no magic
number, but if a large
percentage of the sales
are from the 4 largest
firms, it’s an Oligopoly
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What is an example of a
high concentration ratio?
Out of 151 firms in the
aircraft industry the
leading 4 constitutes
79% of total sales
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For more information on
industry concentration
check out these web pages • http://www.census.gov
• http://www.census.gov/econ/
www/manumenu.html
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What is the HerfindahlHirschman Index (HHI)?
A measure of industry
concentration, calculated as
the sum of the squares of
the market shares held by
each firm in the industry
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How Oligopolistic is the
U.S. Economy?
Oligopoly is very much of
a fact of life in the U.S.
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Is the U.S. becoming
more Oligopolistic?
NO
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What is Market Power?
A firm’s ability to select
and control market
price and output
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What is an
Unbalanced Oligopoly?
An oligopoly in which
the sales of the leading
firms are distributed
unevenly among them
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What is a
Balanced Oligopoly?
An oligopoly in which the
sales of the leading firms
are distributed fairly
evenly among them
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In which type is market
power most concentrated?
Unbalanced Oligopoly
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What is a
Horizontal Merger?
A merger between firms
producing the same good
in the same industry
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What is a
Vertical Merger?
A merger between firms
that have a supplier purchaser relationship
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What is a
Conglomerate Merger?
A merger between firms
in unrelated industries
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For more information on
mergers check out these sites:
• http://www.stocksmart.com/
newsipos.html
• http://www.antitrust.org
• http://www.usdoj.gov/atr/index.html
• http://www.usdoj.gov/atr/guidelin.htm
• http://www.ftc.gov
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What is Collusion?
The practice of firms to
negotiate price and
market decisions that
limit competition
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What is a Cartel?
A group of firms that
collude to limit
competition in a market
by negotiating and
accepting agreed-upon
price and market shares
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Check out the most
effective International
Cartel ever assembled• http://www.opec.org
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What is the relationship
between market
concentration and price?
A high concentration ratio in
an industry translates into
noncompetitive prices
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What is the distinguishing
feature of Oligopoly?
Interdependence - either
firm will not take an
action unless it
considers the reaction
from the other firms
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Imagine 3 identical firms, A,
B, and C in an industry. What
happens If A raises price?
B and C will not
raise their price
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Imagine 3 identical firms in
an industry A, B, C what
happens If A lowers price?
B and C will lower
their price
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Kinked Demand Curve
Starting price
P
MR Gap
D
MR
Q
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What does the kinked
demand curve illustrate?
There is a great deal of price
stability
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How do firms in an
unbalanced Oligopoly set
price?
Most often they practice
price leadership
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What is Price Leadership?
A firm whose price
decisions are tacitly
accepted and followed by
other firms in the industry
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What is an example
nonprice competition?
Brand multiplication
when there are
variations on one good
to increase market share
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What is Game Theory?
A theory of strategy
ascribed to a firm’s
behavior in oligopoly
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For more information about
Game Theory • http://www.pitt.edu/~alroth/a
lroth.html
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What is the Prisoner’s
Dilemma?
A series of individual
choices within a small
group, each one’s choice
effects the outcome of
the others
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An example of the Prisoner’s
Dilemma is the Payoff Matrix
Both Sam and
Bill confess
Sam confesses
and Bill doesn’t
Bill confesses
and Sam
doesn’t
Neither Sam
nor Bill
confesses
For a forum that induces
the interactive Prisoner’s
Dilemma check out • http://serendip.brynmawr.edu/
~ann/pd.html
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What is
Price Discrimination?
The practice of offering a
specific good or service at
different prices to different
segments of the market
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• What is Oligopoly?
• What concentration ratio
constitutes an Oligopoly?
• What is an Unbalanced Oligopoly?
• What is a Balanced Oligopoly?
• What is Collusion?
• What is a Cartel?
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• What is the distinguishing feature
of Oligopoly?
• How do firms in an Oligopoly set
price?
• What is Game Theory?
• What is the Prisoner’s Dilemma?
• What is Price Discrimination?
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END
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