CHAPTER 9: BASIC OLIGOPOLY MODELS
1. Conditions for Oligopoly
2. Profit Maximization in Four Oligopoly
Settings
3. Contestable Markets
Presented by: Rema Hossain
Mary Jane Italia-Jasarino
Oligopoly
Refers to a situation where there are
relatively few large firms in an
industry. No explicit number of firms
is required for oligopoly, but the
number
usually
is
somewhere
between 2 and 10.
Key Conditions for
Oligopoly
Few Dominant
Firms
Market share is
concentrated among a
small number of large
companies.
High Barriers to
Entry
Significant obstacles
prevent new competitors
from entering the
market.
Interdependence
Firms' decisions are closely linked and affect one another.
Role of Beliefs and Strategic
Interaction:
Your actions affect the profits of
your rivals.
Your rivals’ actions affect your
profits.
How will your rivals respond to
your actions?
DEMONSTRATION PROBLEM:
1.Suppose the manager is at point B in Figure 9–1,
charging a price of P0. If the manager believes
rivals will not match price reductions but will
match price increases, what does the demand for
the firm’s product look like?
2. Suppose the manager is at point B in Figure 9–
1, charging a price of P0. If the manager
believes rivals will match price reductions but
will not match price increases, what does the
demand for the firm’s product look like?
Profit Maximization in Four Oligopoly Settings:
1.Sweezy Oligopoly
2.Cournot Oligopoly
3.Stackelberg Oligopoly
4.Beltrand Oligopoly
SWEEZY OLIGOPOLY
• The Sweezy oligopoly model, was developed
by economist Paul Sweezy in the late 1930s.
• The Sweezy oligopoly model, also known as
the kinked demand curve model, explains
price rigidity in markets dominated by a few
firms, where firms are more likely to match
price cuts but not price increases, leading to a
stable price level.
Sweezy Oligopoly Characteristics
An industry in which there are few firms serving
many consumers;
Firms produced differentiated products;
Each firms believe rivals will respond to a price reduction but
will not follow a price increase;
Barrier to entry exist.
Contestable Market
A contestable market is a type of market
characterized by low barriers to entry and
exit, where new firms can enter the market
easily and compete with existing firms.
Characteristics of Contestable Market:
1. All firms have access to the same
technology.
2. Consumers respond quickly to price
changes.
3. Existing firms cannot respond quickly to
entry by lowering price.
4. There are no sunk costs.
Key Implications of Contestable
Market Power:
 Threat of entry disciplines firms
already in the market.
 Incumbents have no market power,
even if there is only a single
incumbent ( a monopolist)