Oligopoly Pricing and Output

• Various models

• Common thread--interdependence assumption--how will competitors react to price and output changes

• At least 2 firms--at least 1 with a significant market share

• Pure or differentiated

Models of Oligopoly

• Cournot model

• Kinked demand curve

• Cartel model--collusion

• Price leadership-barometric or dominant firm

Cournot Model (1838)

• Simple duopoly

• Each firm is a profit maximizer

• Each firm assumes that regardless of own output, other firm’s output will not change

• A observes B producing QB and assumes that regardless of QA, QB = 0

• Mathematical example

Kinked Demand Curve

• Sweezy Model (1939)

• Price cuts will be followed to protect market share

• Price increases will not be followed

• Demand curve is more elastic for price increases than price decreases, thus a kink in the demand curve and a gap in MR

• Graphical model

Cartel Model

• Model of collusion; e.g.., OPEC, NCAA• Set price and output like a monopolist• Methods of allocating production

– Based on past sales, production capacity, regional distribution, or behave like a multi-plant monopolist

• Ease of formation– Few firms, similar product, similar costs

• Mathematical example

Price Leadership

• One firm is price leader--price searcher

• Other firms follow--price takers (P = MRF)

• Followers produce all they want at set price

• Leader produces to satisfy market demand

• QL = QT - QF

• Mathematical example