Managerial economics Business Strategy Chapter 9 Basic oligopoly models Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models
Overview . Conditions for Oligopoly? II. Role of strategic Interdependence III. Profit Maximization in Four Oligopoly Settings Sweezy(Kinked-Demand) Model Cournot model Stackelberg Model Bertrand Model IV Contestable markets Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings Sweezy (Kinked-Demand) Model Cournot Model Stackelberg Model Bertrand Model IV. Contestable Markets
Oligopoly Relatively few firms, usually less than 10 Duopoly -two firms Triopoly -three firms The products firms offer can be either differentiated or homogeneous Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Oligopoly • Relatively few firms, usually less than 10. Duopoly - two firms Triopoly - three firms • The products firms offer can be either differentiated or homogeneous
Role of strategic interaction What you do affects the profits of your rivals What your rival does affects your profits Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Role of Strategic Interaction • What you do affects the profits of your rivals • What your rival does affects your profits
An example You and another firm sell differentiated roducts How does the quantity demanded for your product change when you change your rice? Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 An Example • You and another firm sell differentiated products • How does the quantity demanded for your product change when you change your price?
D2(Rival matches your price change H 0 Rival holds its price const Q Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 P Q D1 P0 Q0 PL D2 (Rival matches your price change) P H (Rival holds its price constant)
D2 (Rival matches your price change) Demand if Rivals match Price Reductions but not price increases P I(Rival holds its price constan D Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 P Q D1 P0 Q0 D2 (Rival matches your price change) (Rival holds its price constant) D Demand if Rivals Match Price Reductions but not Price Increases
Key Insight The effect of a price reduction on the quantity demanded of your product depends upon whether your rivals respond by cutting their prices too The effect of a price increase on the quantity demanded of your product depends upon whether your rivals respond by raising their prices too! Strategic interdependence: You arent in complete control of your own destiny Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Key Insight • The effect of a price reduction on the quantity demanded of your product depends upon whether your rivals respond by cutting their prices too! • The effect of a price increase on the quantity demanded of your product depends upon whether your rivals respond by raising their prices too! • Strategic interdependence: You aren’t in complete control of your own destiny!
Sweezy (Kinked-Demand) Model Few firms in the market Each producing differentiated products Barriers to entry Each firm believes rivals will match(or follow) price reductions, but wont match (or follow) price increases Key feature of Sweezy Model a Price-Rigidity Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Sweezy (Kinked-Demand) Model • Few firms in the market Each producing differentiated products. • Barriers to entry • Each firm believes rivals will match (or follow) price reductions, but won’t match (or follow) price increases. • Key feature of Sweezy Model Price-Rigidity
Sweezy Marginal Revenue P D2(Rival matches your price change) 0 D MR (Rival holds its price constant MRI MR Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Sweezy Marginal Revenue P Q D1 P0 Q0 D2 (Rival matches your price change) (Rival holds its price constant) MR1 MR2 D MR
