strategic decisions making in oligopoly markets today's lectures will look at oligopoly markets...

Strategic Decisions Making in Strategic Decisions Making in Oligopoly MarketsOligopoly Markets

Today's lectures will look at Oligopoly Today's lectures will look at Oligopoly marketsmarkets

Features of OligopolyFeatures of Oligopoly Interdependence between Oligopoly Interdependence between Oligopoly

firmsfirms Game theoryGame theory

OligopolyOligopoly

Competition between the fewCompetition between the few May be a large number of firms in the industry May be a large number of firms in the industry

but the industry is dominated but the industry is dominated by a small number of very large producersby a small number of very large producers

Concentration RatioConcentration Ratio – the proportion of – the proportion of total market sales (share) held by the top total market sales (share) held by the top 3,4,5, etc firms:3,4,5, etc firms: A 4 firm concentration ratio of 75% means the A 4 firm concentration ratio of 75% means the

top 4 firms account for 75% of all top 4 firms account for 75% of all the sales in the industrythe sales in the industry

OligopolyOligopoly

Example:Example: Music sales – Music sales –

The music industry has a 5-firm concentration ratio of 75%. Independents make up 25% of the market but there could be many thousands of firms that make up this ‘independents’ group. An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large sellers.

Market Share of the Music Industry 2002. Source IFPI: http://www.ifpi.org/site-content/press/20030909.html

http://www.ifpi.org/site-content/press/20030909.html

OligopolyOligopoly

Features of an oligopolistic market Features of an oligopolistic market structure:structure:

Price may be relatively stable across the industry – Price may be relatively stable across the industry – kinked demand curve?kinked demand curve?

Potential for collusionPotential for collusion Behaviour of firms affected by what they believe their rivals Behaviour of firms affected by what they believe their rivals

might do – interdependence of firmsmight do – interdependence of firms Goods could be homogenous or highly differentiatedGoods could be homogenous or highly differentiated Branding and brand loyalty may be a potent source of competitive Branding and brand loyalty may be a potent source of competitive

advantageadvantage Non-price competition may be prevalentNon-price competition may be prevalent Game theory can be used to explain some behaviourGame theory can be used to explain some behaviour AC curve may be saucer shaped – minimum efficient scale AC curve may be saucer shaped – minimum efficient scale

could occur over large range of outputcould occur over large range of output High barriers to entryHigh barriers to entry

Strategic Decisions Making in Strategic Decisions Making in Oligopoly MarketsOligopoly Markets

What is Strategic behavior????What is Strategic behavior???? NB Interdependence of firms profits the NB Interdependence of firms profits the

distinguishing characteristics of oligopoly distinguishing characteristics of oligopoly markets arises when the number of firms markets arises when the number of firms in a market is small enough that every in a market is small enough that every firms output and decision affects the firms output and decision affects the demand and MR condition of every other demand and MR condition of every other firmfirm

Decision Making when Rivals Decision Making when Rivals make simultaneous decisionsmake simultaneous decisions

What is Game Theory?????What is Game Theory?????

What is a game????What is a game????

What is a simultaneous decision What is a simultaneous decision game????game????


What is the prisoners dilemma???What is the prisoners dilemma???

What is the payoff table?????What is the payoff table?????


Don’t Don’t ConfessConfess

ConfessConfess

Don’t ConfessDon’t Confess A 2 year, 2 A 2 year, 2 yearsyears

B 12 years, 1 B 12 years, 1 yearyear

ConfessConfess C 1 year, 12 C 1 year, 12 yearsyears

D 6 years, 6 D 6 years, 6 yearsyears


What is common knowledge????What is common knowledge????

What is dominant strategy?????What is dominant strategy?????


NB When a dominant strategy exists an NB When a dominant strategy exists an action that always provides a manager action that always provides a manager with the best outcome no matter what with the best outcome no matter what action the managers rival chooses to takeaction the managers rival chooses to take

A rational decision maker always chooses A rational decision maker always chooses to follow its dominant strategy and predict to follow its dominant strategy and predict that if its rivals have dominant strategies that if its rivals have dominant strategies they also choose to follow their dominant they also choose to follow their dominant strategiesstrategies


What is dominant strategy What is dominant strategy equilibrium???equilibrium???

NB A prisoners dilemma arises when all NB A prisoners dilemma arises when all rivals possess dominant strategies and rivals possess dominant strategies and in dominant strategy equilibrium they all in dominant strategy equilibrium they all are are worse off than if they colludedare are worse off than if they colluded


High ($10)High ($10) Low ($6)Low ($6)

High High ($10)($10)

A ($1000,$1000)A ($1000,$1000) B ($500,$1200)B ($500,$1200)

Low($6)Low($6) C ($1200,$300)C ($1200,$300) D ($400,$400)D ($400,$400)


Dominant strategy for Palace is to charge Dominant strategy for Palace is to charge $6 however castle does not have a $6 however castle does not have a dominant strategy. B is the dominant dominant strategy. B is the dominant strategy.strategy.

NB When a firm does not have a dominant NB When a firm does not have a dominant strategy but at least one its rivals does strategy but at least one its rivals does have a dominant strategy the firms have a dominant strategy the firms manager can predict with confidence that manager can predict with confidence that its rival will follow its strategy.its rival will follow its strategy.


The manager can choose its own The manager can choose its own best strategy knowing the actions best strategy knowing the actions that will almost certainly be taken by that will almost certainly be taken by those rivals possessing dominant those rivals possessing dominant strategies.strategies.

What are dominated strategies????What are dominated strategies????

Successive Elimination of Successive Elimination of Dominated StrategiesDominated Strategies

What is successive elimination of What is successive elimination of dominated strategies?????dominated strategies?????

Study table 13.3 Dominant strategy Study table 13.3 Dominant strategy CC

Making Mutually Best Making Mutually Best DecisionsDecisions

What is Nash Equilibrium????What is Nash Equilibrium????

NB In order for all firms in an oligopoly to be NB In order for all firms in an oligopoly to be predicting correctly each others decision. predicting correctly each others decision.

Managers cannot make best decisions Managers cannot make best decisions without correct predictions- all firms be without correct predictions- all firms be choosing individually best actions given the choosing individually best actions given the predicted actions of their rivals which they predicted actions of their rivals which they can then believe are correctly predicted.can then believe are correctly predicted.


NB Nash decisions are likely to be NB Nash decisions are likely to be chosen because Nash sets are mutually chosen because Nash sets are mutually best and thus strategically stable.best and thus strategically stable.

No firm can do better unilaterally its No firm can do better unilaterally its decision Non- Nash are unlikely to be decision Non- Nash are unlikely to be chosen because at least one firm can chosen because at least one firm can do better by unilaterally changing its do better by unilaterally changing its actionsactions


Study table 13.4Study table 13.4

Nash equilibrium is A $50, $40Nash equilibrium is A $50, $40

Why doesn’t coke and pepsi Why doesn’t coke and pepsi collude????collude????


NB When managers faces a NB When managers faces a simultaneous decision possessing a simultaneous decision possessing a unique Nash equilibrium set of decisions unique Nash equilibrium set of decisions rivals can be expected to make the rivals can be expected to make the decisions to lead to the Nash decisions to lead to the Nash equilibrium.equilibrium.

If there are multiple Nash equilibria If there are multiple Nash equilibria there is generally no way to predict the there is generally no way to predict the likely outcome.likely outcome.

Strategic Moves Strategic Moves Commitments, Commitments,

Threats and PromisesThreats and Promises What is a strategic move????What is a strategic move????

What is credible????What is credible????

What is commitments????What is commitments????

Strategic Moves Commitments, Strategic Moves Commitments,

Threats and PromisesThreats and Promises What is a threat????What is a threat????

What is a promise?????What is a promise?????

Cooperation in Repeated Cooperation in Repeated Strategic DecisionsStrategic Decisions

What is cooperation????What is cooperation????

What are repeated decisions?????What are repeated decisions?????

Lets study table 13.5Lets study table 13.5


What is cheating?????What is cheating?????

What is punishment for cheating????What is punishment for cheating????

NB Cooperation is possible in every NB Cooperation is possible in every prisoners dilemma decision but prisoners dilemma decision but cooperation is not strategically stable cooperation is not strategically stable when the decision is made only once.when the decision is made only once.


In one time prisoners dilemma there In one time prisoners dilemma there can be no future consequences from can be no future consequences from cheating so both firms expect the cheating so both firms expect the other to cheat which then makes other to cheat which then makes cheating their best response.cheating their best response.

What is the punishment for What is the punishment for cheating????cheating????

Trigger Strategies for Trigger Strategies for Punishing CheatingPunishing Cheating

What are trigger strategies?????What are trigger strategies?????

What are tit for tat strategies????What are tit for tat strategies????

What are grim strategies????What are grim strategies????

Pricing Strategies that Pricing Strategies that Facilitate CooperationFacilitate Cooperation

Facilitating practicesFacilitating practices

What are price matching????What are price matching????

What are sale price guarantee????What are sale price guarantee????


What is public pricing????What is public pricing????

What is price leadership????What is price leadership????

What is a cartel????What is a cartel????


What is tacit collusion????What is tacit collusion????

What is strategic entry What is strategic entry deterrence????deterrence????

strategic decisions making in oligopoly markets today's lectures will look at oligopoly markets...

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