Week 8 Flashcards
price war definition and outcome
what is two way firms within an oligopoly avoid price wars
by restricting competition and not allowing firms to enter and cause a price war > predatory pricing
by limit pricing limiting supernormal profits to create barriers to entry and protect themselves and long run supernormal profit
predatory pricing definition and outcomes for an oligopoly
what are 6 assumptions of oligopolies
interdependence definition
firms don’t make decisions on their own they make they decisions based off of the actions/reactions of rival firms
how does the kinked demand curve show that firms dont want to change price
1) raising price - due to being elastic will have a greater decrease in demand, lose revenue lose market share as interdependence and firms won’t follow
2) reducing price - due to being inelastic will have greater decrease in price than increase in price, other firms due to interdependence will follow and enter a price war > market share will remain the same but lose TR
leads to price rigidity (sticky/stable prices)
how does the kinked demand curve show that firms don’t need to change price
by drawing MR on the kinked demand curve
shows that assuming oligopoly is profit max and produce at output MR = MC
as long as costs lie within the kink of the vertical line then the price will always remain at P1
what are the 2 ways the kinked demand curve shows price rigidity
shows that firms don’t want to change price and firms don’t need to
> prices stay sticky/stable
what are the 3 conclusions of oligopolies
1) although there is price rigidity > firms may want more market share by reducing price (price war)
e.g supermarkets
2) more non-price competition such as competition on branding, advertisement and differentiating
3) temptation to collude and break interdependence to not worry about firms prices and make high supernormal profits acting as a monopoly
nash equilibrium in game theory
a rational equilibrium that can last in the long term (the box where both A and B end up)
3 conclusions of game theory and the prisoners dilemma
1) price rigidity - due to interdependence both firms will be trapped at the nash equilibrium
2) temptation to collude - by breaking interdependence and colluding (forming a cartel) both firms can charge both £1 and make supernormal profits
3) incentive to cheat on collusive agreement and undercut for the £4m but in the long term both firms will end up back at the nash equilibrium
> that is why collusion may not last in the long term
> may also cheat if competition authorities scare firms)
what behavior causes firms in an oligopoly to act either more competitive or collusive (cartel)
depends where the oligopoly lies within the market structures
e.g large number of firms will be more competitive
or
high barriers to entry incentive’s collusion
factors promotin competitive oligopoly
evaluate using competitive markets outcomes
factors promoting collusive oligopoly
evaluate monopoly outcomes
