Duopoly

5 Key excerpts on "Duopoly"

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  eBook - ePub

  Managerial Decision Making

  • J. Bridge, J. C. Dodds(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  Table 6.2 . Further examination of the Census data reveals that if the rate of growth in concentration experienced during the 1958-68 period is maintained, something of the order of two thirds of products will have concentration ratios (based on net output) of between 80 and 100 per cent by 1993. Thus as overall concentration, industry concentration and concentration in specific product markets is increasing, a study of big business behaviour is vital to economists and students of management alike. The rest of this chapter examines models of oligopoly behaviour and discusses some of the attempts to control oligopoly and monopoly through public policy.

  Oligopoly relates to fewness of sellers (Duopoly where there are only two) and it can take the pure form (where there is an homogeneous product) or the more usual imperfect form where there is product differentiation. The distinguishing feature of oligopoly is not just the number of sellers but rather the mutual interdependence felt by oligopolistic firms in their decision making. We illustrated above how firms under conditions of perfect competition were price takers and free to pursue their output policy without recourse to considering the activities of other firms operating in the same market. An absolute monopolist with complete control of a product and its close substitutes, is also free to pursue an independent line of policy. When we come to oligopoly, however, a firm must have regard to the activities of other firms in the industry who are supplying for the same market. This is not to say that at all decision levels this will be the case but certainly for many strategic decisions governing the future course of the firm – such as the launching of new products and the associated advertising and promotional expenditures firms should take account of the anticipated reactions of rivals. Pricing decisions, although frequently classified as operating decisions* may also give rise to interdependence. In fact there may be a complex interplay of anticipated strategies and counter-strategies which firms engage in, a topic which is examined later in this section in terms of the theory of games. Firms can either ignore interdependence - particularly for operating decisions (as we illustrate later in the Baumol sales revenue maximisation model) or make some specific evaluation as to how rivals will react to a given policy change; this evaluation is sometimes called the ‘conjectural variation’. Alternatively they may try to reduce the uncertainty of interdependence by collusion (see G. Stigler [142

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  Available until 5 Dec |Learn more

  Economic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  In the Coca-Cola example, we see how important it is to a company to maintain its dominant position. But instead of keeping ahead of competitors by innovating and keeping prices low, Coca-Cola worked to stifle competition of smaller competitors and create a stable relationship with their main competitor, Pepsi, to divide up the market. Instead of competing with prices, Coke and Pepsi competed with advertising and by buying up prime space in retailers.

  The behaviors of Coca-Cola and Pepsi are typical of industries that are dominated by a small number of huge firms. Collusion and market domination are so profitable that the dominant firms will do almost anything to maintain their market position and keep out any new competition. It is only in oligopolies with more than three major competitors, such as the automobile industry with more than ten big firms, that competition provides enough check on collusive behavior and the power of dominant firms.

  Colluding oligopolies, by working to control the entire market, are actually behaving much like a monopoly. Monopolies tend to be so inefficient and bad for consumers that we almost always regulate them in some way.

  12.5 Monopoly

  A monopoly is the least competitive market structure with only one firm present and no close substitutes (a unique product). Monopolies are maintained by prohibitive barriers to entry, and their control over the market gives them complete control over prices. Monopolies are generally to be avoided: Firms with monopolies can charge high prices and produce shoddy products and still make a huge profit. Consequently, there is not a single unregulated monopoly in the United States. Firms that become monopolies are usually broken up using antitrust laws or regulated if they are natural monopolies.

  Most monopolies that exist today are considered to be natural monopolies. A natural monopoly is a market where multiple firms producing a product would be less efficient than production by one firm only

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  eBook - PDF

  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Chapter 4 The Firm and Market Structures 145 industries are doomed to extinction by a lack of profits. On the contrary, millions of busi- nesses that do very well are living under the pressures of perfect competition. Monopolistic competition is also highly competitive; however, it is considered a form of imperfect competition. Two economists, Edward H. Chamberlin (United States) and Joan Robinson (United Kingdom), identified this hybrid market and came up with the term because there are strong elements of competition in this market structure and also some monopoly-like conditions. The competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation. That is, if the seller can convince consumers that its product is uniquely different from other, similar products, then the seller can exercise some degree of pricing power over the market. A good example is the brand loyalty associated with soft drinks such as Coca-Cola. Many of Coca-Cola’s customers believe that the beverage is truly different from and better than all other soft drinks. The same is true for fashion creations and cosmetics. The oligopoly market structure is based on a relatively small number of firms supplying the market. The small number of firms in the market means that each firm must consider what retaliatory strategies the other firms will pursue when prices and production levels change. Consider the pricing behavior of commercial airline companies. Pricing strategies and route scheduling are based on the expected reaction of the other carriers in similar markets. For any given route—say, from Paris, France, to Chennai, India—only a few carriers are in competition. If one of the carriers changes its pricing package, others will likely retaliate. Understanding the market structure of oligopoly markets can help in identifying a logical pattern of strategic price changes for the competing firms.

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  eBook - ePub

  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  When is an oligopoly not an oligopoly? There are two extreme cases of this situation. A normal oligopoly has a few firms producing a differentiated good, and this differentiation gives them pricing power.

  At one end of the spectrum, we have the oligopoly with a credible threat of entry. In practice, if the oligopolists are producing a good or service that can be easily replicated, has limited economies of scale, and is not protected by brand recognition or patents, they will not be able to charge high prices. The easier it is for a new supplier to enter the market, the lower the margins. In practice, this oligopoly will behave very much like a perfectly competitive market.

  At the opposite end of the spectrum, we have the case of the cartel. Here, the oligopolists collude and act as if they were a single firm. In practice, a very effective cartel enacts a cooperative strategy. As shown in Section 5.1, instead of going to a Nash equilibrium, the cartel participants go to the more lucrative (for them) cooperative equilibrium.

  A cartel may be explicit (that is, based on a contract) or implicit (based on signals). An example of signals in a Duopoly would be that one of the firms reduces its prices and the other does not. Because the firm not cutting prices refuses to start a price war, the firm that cut prices may interpret this signal as a suggestion to raise prices to a higher level than before, so that profits may increase for both.

  6.1 MONOPOLY

  Monopoly market structure is at the opposite end of the spectrum from perfect competition. For various reasons, there are significant barriers to entry such that a single firm produces a highly specialized product and faces no threat of competition. There are no good substitutes for the product in the relevant market, and the market demand function is the same as the individual firm’s demand schedule. The distinguishing characteristics of monopoly are that a single firm represents the market and significant barriers to entry exist . Exhibit 4-1 identified the five characteristics of monopoly markets:

  1. There is a single seller of a highly differentiated product.

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  eBook - ePub

  Managerial Economics

  A Strategic Approach

  • Robert Waschik, Tim Fisher, David Prentice(Authors)
  • 2010(Publication Date)
  • Routledge

    (Publisher)

  Part II Strategic interaction between firms 6 Strategy in a market with two firms When you are finished with this chapter, you should understand: • The basic models we use to describe behaviour in a Duopoly market where two firms compete by choosing either price or quantity • In the Cournot model of quantity competition, when two firms compete by choosing quantity of output, the equilibrium market price is lower, individual firm profits are lower, and total market output is higher relative to the monopoly equilibrium • In the Bertrand model of price competition, adding just one more firm to a market which was initially monopolized drives the market to the perfectly competitive equilibrium, where both firms earn zero profits • How the simple Bertrand model can be extended to allow for product differentiation or capacity constraints • How the Stackelberg model can be used to describe a market where one firm can commit to the choice of a strategy before its competitor, and that when firms compete in quantities, the Stackelberg leader has a first-mover advantage and is able to increase profits and market share at the expense of its competitor If the discussion in Chapter 5 has shown us anything, it is that the manager’s decision-making problem is potentially very complicated when the manager takes into account all of the strategic effects and responses in the marketplace. In order to shed some light on how strategic interactions affect the manager’s decision-making problem, we will begin in this chapter by considering the simplest of the manager’s problems. As such, some of the analysis of this chapter may seem overly simplistic and restrictive

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