Chapter
13
Oligopoly: Firms in Less
Competitive Markets
Prepared by:
Fernando & Yvonn Quijano
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
Competing
with Wal-Mart
Learning Objectives
13.1 Show how barriers to entry
explain the existence of
oligopolies.
13.2 Use game theory to analyze the
strategies of oligopolistic firms.
13.3 Use sequential games to analyze
business strategies.
13.4 Use the five competitive forces
model to analyze competition in
an industry.
In an oligopoly, a firm’s
profitability depends on its
interactions with other firms.
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Chapter 13: Oligopoly: Firms in Less Competitive Markets
Oligopoly: Firms in Less Competitive Markets
Oligopoly A market structure
in which a small number of
interdependent firms compete.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.1
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Oligopoly and Barriers to Entry
Table 13-1
Examples of Oligopolies in
Retail Trade and Manufacturing
RETAIL TRADE
INDUSTRY
MANUFACTURING
FOUR-FIRM
CONCENTRATION
RATIO
INDUSTRY
FOUR-FIRM
CONCENTRATION
RATIO
Discount Department Stores
95%
Cigarettes
95%
Warehouse Clubs and
Supercenters
92%
Beer
91%
Hobby, Toy, and Game Stores
72%
Breakfast Cereal
82%
Athletic Footwear Stores
71%
Aircraft
81%
College Bookstores
70%
Automobiles
76%
Radio, Television, and Other
Electronic Stores
69%
Dog and Cat Food
76%
Pharmacies and Drugstores
53%
Dog and Cat Food
64%
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Learning Objective 13.1
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Oligopoly and Barriers to Entry
Barriers to Entry
Barrier to entry Anything that
keeps new firms from entering an
industry in which firms are earning
economic profits.
Economies of Scale
Economies of scale The
situation when a firm’s long-run
average costs fall as it increases
output.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.1
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Oligopoly and Barriers to Entry
Barriers to Entry
Economies of Scale
FIGURE 13.1
Economies of Scale Help
Determine the Extent of
Competition in an Industry
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Learning Objective 13.1
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Oligopoly and Barriers to Entry
Barriers to Entry
Ownership of a Key Input
If production of a good requires a
particular input, then control of that
input can be a barrier to entry.
Government-Imposed Barriers
Patent The exclusive right to a
product for a period of 20 years
from the date the product is
invented.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
Game theory The study of how people make
decisions in situations in which attaining their
goals depends on their interactions with
others; in economics, the study of the
decisions of firms in industries where the
profits of each firm depend on its interactions
with other firms.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
All games share three key characteristics:
1 Rules that determine what actions
are allowable
2 Strategies that players employ to
attain their objectives in the game
3 Payoffs that are the results of the
interaction among the players’
strategies
Business strategy Actions taken by a firm
to achieve a goal, such as maximizing
profits.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
A Duopoly Game: Price Competition between Two Firms
FIGURE 13.2
A Duopoly Game
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
A Duopoly Game: Price Competition between Two Firms
Payoff matrix A table that shows the payoffs that each firm
earns from every combination of strategies by the firms.
Collusion An agreement among firms to charge the same
price or otherwise not to compete.
Dominant strategy A strategy that is the best for a firm, no
matter what strategies other firms use.
Nash equilibrium A situation in which each firm chooses the
best strategy, given the strategies chosen by other firms.
Don’t Let This Happen to YOU!
Don’t Misunderstand Why Each Manager Ends Up Charging a Price of $400
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Making
Chapter 13: Oligopoly: Firms in Less Competitive Markets
the
Connection
A Beautiful Mind: Game Theory Goes
to the Movies
In the film A Beautiful Mind,
Russell Crowe played John
Nash, winner of the Nobel
Prize in Economics.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
Firm Behavior and the Prisoners’ Dilemma
Cooperative equilibrium An equilibrium in a
game in which players cooperate to increase their
mutual payoff.
Noncooperative equilibrium An equilibrium in a
game in which players do not cooperate but
pursue their own self-interest.
Prisoners’ dilemma A game in which pursuing
dominant strategies results in noncooperation that
leaves everyone worse off.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Solved Problem
13-2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi?
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Making
Chapter 13: Oligopoly: Firms in Less Competitive Markets
the
Connection
Is There a Dominant Strategy
for Bidding on eBay?
On eBay, bidding the maximum value you place on an
item is a dominant strategy.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
Can Firms Escape the Prisoners’ Dilemma?
FIGURE 13.3
Changing the Payoff
Matrix in a Repeated
Game
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
Can Firms Escape the Prisoners’ Dilemma?
Price leadership A form of implicit
collusion where one firm in an
oligopoly announces a price
change, which is matched by the
other firms in the industry.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Making American Airlines and Northwest
Airlines Fail to Cooperate on a
Connection Price Increase
Chapter 13: Oligopoly: Firms in Less Competitive Markets
the
The airlines have trouble raising the price this business
traveler pays for a ticket.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
Cartels: The Case of OPEC
Cartel A group of firms that collude by agreeing
to restrict output to increase prices and profits.
FIGURE 13.4
World Oil Prices, 1972–2006
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Learning Objective 13.2
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Using Game Theory to Analyze Oligopoly
Cartels: The Case of OPEC
FIGURE 13.5
The OPEC Cartel with
Unequal Members
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Learning Objective 13.3
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Sequential Games and Business Strategy
Deterring Entry
FIGURE 13.6
The Decision Tree for an
Entry Game
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Learning Objective 13.3
Solved Problem
13-3
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Is Deterring Entry Always a Good Idea?
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Learning Objective 13.3
Chapter 13: Oligopoly: Firms in Less Competitive Markets
Sequential Games and Business Strategy
Bargaining
FIGURE 13.7
The Decision Tree for
a Bargaining Game
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Learning Objective 13.4
Chapter 13: Oligopoly: Firms in Less Competitive Markets
The Five Competitive Forces Model
FIGURE 13.8
The Five Competitive Forces Model
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Learning Objective 13.4
Chapter 13: Oligopoly: Firms in Less Competitive Markets
The Five Competitive Forces Model
Competition from Existing Firms
Competition among firms in an industry can lower
prices and profits.
Competition in the form of advertising, better
customer service, or longer warranties can also
reduce profits by raising costs.
The Threat from Potential Entrants
Firms face competition from companies that
currently are not in the market but might enter. We
have already seen how actions taken to deter entry
can reduce profits.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.4
Chapter 13: Oligopoly: Firms in Less Competitive Markets
The Five Competitive Forces Model
Competition from Substitute Goods or Services
Firms are always vulnerable to competitors
introducing a new product that fills a consumer
need better than their current product does.
The Bargaining Power of Buyers
If buyers have enough bargaining power, they can
insist on lower prices, higher-quality products, or
additional services.
The Bargaining Power of Suppliers
If many firms can supply an input and the input is
not specialized, the suppliers are unlikely to have
the bargaining power to limit a firm’s profits.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Learning Objective 13.4
Making Is Southwest’s Business Strategy
More Important Than the Structure
Connection of the Airline Industry?
Chapter 13: Oligopoly: Firms in Less Competitive Markets
the
Southwest’s business strategy allowed it to remain
profitable when many other airlines faced heavy losses.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 13: Oligopoly: Firms in Less Competitive Markets
An Inside LOOK
Can Target Compete with Wal-Mart
in the Market for Generic Drugs?
Target Says It Will Match Wal-Mart’s $4 Generic Drug Price
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 13: Oligopoly: Firms in Less Competitive Markets
Key Terms
Barrier to entry
Business strategy
Cartel
Collusion
Cooperative equilibrium
Dominant strategy
Economies of scale
Game theory
Nash equilibrium
Noncooperative equilibrium
Oligopoly
Patent
Payoff matrix
Price leadership
Prisoners’ dilemma
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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