Bertrand Oligopoly
Bertrand oligopoly is a market structure in which a small number of firms compete by setting prices for their products. Each firm assumes that its rivals will not change their prices in response to its own price changes. This can lead to price competition and lower prices for consumers, as firms try to undercut each other to gain market share.
6 Key excerpts on "Bertrand Oligopoly"
eBook - ePub- Bonnie Nguyen, Andrew Wait(Authors)
- 2015(Publication Date)
- Routledge(Publisher)
...CHAPTER 15 Oligopoly DOI: 10.4324/9781315690339-15 15.1 Introduction We now turn to the case of oligopoly, a market that contains a small number of firms. Because there are only a handful of key producers in the market, the decisions of each firm have ramifications for not only itself but also for each of its competitors. For example, if Dell adjusts its price for one of its laptops, this will generally have an impact on its competitors, such as HP. Similarly, if a department store decides to advertise, it might be able to increase its customer base at the expense of other firms. Given the impact oligopolists have on one another, a firm’s strategic choice – be it price, its output, whether it introduces a new product and so on – will typically depend on what other firms in the market are doing. For instance, a brewer might consider dropping its price following a price reduction from a major beer manufacturer in the same market. In the soft-drink market, following the introduction of a new energy drink by Pepsi, Coca-Cola may choose to respond with its own alternative. In a similar way, if Samsung introduces a new phone handset, Apple will consider what it should do regarding a new version of its iPhone. A pharmaceutical company will consider what new drugs its rivals are trying to develop (and those that they already have patents for) when considering its own research and development programme. This strategic interaction between firms is a key feature of oligopoly; moreover, this sort of strategic interaction is absent in other market structures we previously studied (perfect competition, monopoly and monopolistic competition). We model strategic interaction in oligopoly using game theory. We have previously discussed the core concepts and tools of game theory in Chapter 3. In this chapter, our goal is to illustrate how game theory tools can be applied in the context of an oligopoly...
eBook - ePubIntermediate Microeconomics
Neoclassical and Factually-oriented Models
- Lester O. Bumas(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...Each knows the existence of rivals selling close substitutes and, I suspect, pays some attention to their activities. These very small firms are also quasi-oligopolies. By the way, Adam Smith was well aware of the significance of the size of the market. His chapter “That the Division of Labour is Limited by the Size of the Market” indicates this. In a small market, he asserted, the country carpenter “is not only a carpenter, but a joiner, a cabinet maker, and even a carver in wood, as well as a wheelwright, a ploughwright, a cart and waggon maker” (1937, [1776], p. 17). Summary on Oligopoly Oligopolies are large firms which dominate an industry and are rival conscious. Some of our most important industries are dominated by oligopolies. Cournot’s duopoly model is the oldest of those attempting to indicate the effect of a rival on the decision-making of a firm. Sweezy’s kinked demand function, based upon the assumed reactions of rivals, helps to explain the tendency of oligopoly prices to be sticky—to respond slowly to changes in supply and demand. Game theoretic models attempt to add to our understanding of the strategic actions made in the context of expected responses and sometimes independent actions of rivals. Concentration ratios are a measure of the extent of monopolization in a market. The traditional four largest firm measure has many imperfections, some of which are resolved by the Herfindahl-Hirschman concentration index. Price leadership frequently evolves in lieu of price competition. Non-price competition is the norm in stable oligopolies. Their advantage is that some forms of non-price competition are difficult to emulate, some can be hidden from view, and none are as threatening as price competition. Oligopolistic markets have barriers to entry. These arise from the economies of large-scale production, large financial start-up requirements, the need for special hard-to-get resources, and the requirement of special know-how...
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...12 Oligopoly Non-Collusive Models: Coumot, Bertrand, Chamberlin, Kinked-Demand, StacHeberg ; Collusive Models: Price-Leadership, Cartels ; Game Theory. The market structure of oligopoly, similar to that of monopolistic competition, is situated somewhere on the continuum between the models of perfect competition and monopoly. Unlike the three previous market structures, each of which can be dealt with as a single model, there are a plethora of models of oligopoly. A single thread running through this group of models is that the industry is composed of a few sellers, a small enough number that they are aware of each other. However, the way in which they acknowledge or act upon their interdependence with each other differs from one model to the other. Firms that were previously monopolies in their own domestic markets may become oligopolies as a result of regional integration or from greater trade liberalization. It is useful to examine the myriad models, non-collusive and collusive, and to observe their evolution as market conditions change over time. In this chapter, several of the classical or traditional models and the standard models of oligopoly, including the Game Theory are examined. The more recent developments in the theory of the firm pertaining mainly to the market structure of oligopoly are left to the next chapter. 12.1 Assumptions, Definitions and Summary of Models 12.1.1 Assumptions There are a number of assumptions that are common to all models of oligopoly. These are: The industry consists of a small number of firms...
eBook - ePub- Peter Curwen, Peter Else(Authors)
- 2006(Publication Date)
- Routledge(Publisher)
...However, it has not, in the main, succeeded in producing a more determinate theory of oligopoly than the traditional approach, In our simplified example the conclusions we were able to draw, although illustrating some of the possibilities, were specific to the numbers in the pay-off matrix. Further, as the number of firms increases, the solutions become more complex and less determinate because of the possibility of collusive coalitions between subgroups of firms within the industry. Nevertheless, the theory of games has been found to provide a useful framework within which oligopolistic, and indeed other forms of economic behavior, can fruitfully be studied. Notes 1 This is identical to the profit-maximizing position of a multi-plant monopolist. 2 Here it should be recalled that MR = P (1 + 1/ e). 3 Expected profits can be worked out as in expression (7.11) above. 4 In this case, B 1 is said to dominate all other strategies. Exercises 14.1 How would you identify an oligopolistic industry in practice? Use your criterion to identify one or more oligopolistic industries in the UK. From casual observation, to what extent do you think the behavior of firms in the industry (or industries) you have identified corresponds to that described in any theoretical model of oligopolistic behavior you have met? 14.2 The (inverse) market demand curve for a given product can be represented by the equation P = 32.50 – 0.05Q, where P is the price in £s and Q the quantity demanded...
eBook - ePubIntermediate Microeconomics
A Tool-Building Approach
- Samiran Banerjee(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...Chapter 13 Oligopoly Just as economists make sense of what happens in competitive markets in terms of the market equilibrium that arises from the interaction of demand and supply, in an oligopolistic equilibrium, the behavior of firms corresponds to that of a Nash equilibrium (NE), i.e., each firm is maximizing its profit given the actions of the others. Oligopolies are usually modeled in one of two ways: firms either choose the quantities they wish to produce (quantity competition), or they choose the prices they wish to charge (price competition). While the game-theoretic ideas are exactly the ones introduced in Chapter 12, the only difference is that the firms typically choose their actions from a continuum rather than a finite set of discrete options. For instance, under quantity competition, a firm can choose any output ranging from zero to its capacity; under price competition, a firm can charge any price ranging from its marginal cost of production to the maximum price that buyers are willing to pay for it. 13.1 Static Quantity Competition We begin with an example of the classic duopoly model of Augustin Cournot that dates back to 1838 but is still one of the most important ways in which economists think about quantity competition. 13.1.1 Cournot duopoly Two firms produce a homogeneous good. Firm 1 produces quantity q1 and 2 produces q2, so the total quantity produced is Q = q 1 + q 2. The firms face an inverse market demand given by p = 200 – Q, or p = 200 – q 1 – q 2. It costs each firm $20 to produce each unit of output. We assume that each firm chooses its own output taking as given the other firm’s production level. Graphical representation One way to find a NE for this problem graphically is to plot each firm’s bestresponse to the other firm’s output choice and find a point of mutual bestresponse. To do so, assume that firm 2 has chosen its output level arbitrarily at q 2...
eBook - ePubExperimental Economics
Volume II: Economic Applications
- Pablo Branas-Garza, Antonio Cabrales, Pablo Branas-Garza, Antonio Cabrales(Authors)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
...This work shows that a 35-period horizon is sufficient to allow most subjects to converge surprisingly closely on Bertrand’s prediction, with some experimental sessions in which predicted and observed behavior coincide. Figure 2.1 shows the evolution of prices in a typical session of the experiment. Figure 2.1 Bertrand-Nash vs. actual behavior in a differentiated oligopoly with five varieties Note : After few periods of price volatility, subjects’ strategies clearly converge to the Bertrand-Nash prediction (B) and move away from the monopoly (collusive) price (m). Source : García-Gallego and Georgantzís (2001b) Subsequently, García-Gallego and Georgantzís (2001a) implement the same conditions of demand and costs as those in García-Gallego (1998) to test the predictive power of Bertrand-Nash with multiproduct firms. The theory predicts that, if the same multiproduct firm jointly produces two or more substitute goods, their prices will be higher than if independent competitors offered the goods. Although the problem of a multiproduct firm is much more complex than that of a firm with a single product, the existence of a multiproduct firm leads to the prediction of an asymmetric Bertrand equilibrium, where the firms producing more goods tend to set higher prices. Surprisingly, the experiments in García-Gallego and Georgantzís (2001a) suggest that multiproduct firms do not understand the strategic profits they can derive from their multiproduct market power. This is why they behave as if their products were competing with each other. Therefore, trial-and-error learning in an oligopolistic market with uniproduct firms leads to strategies that are close to the Bertrand-Nash equilibrium. However, in the multiproduct case, trial-and-error learning does not support the corresponding asymmetric Bertrand-Nash equilibrium...
