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4.6 Oligopoly
Oligopoly satisfies the
following conditions:
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a small number of producers; and,
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actions of a producer perceptible to rivals, i.e.
interdependency of sellers whereby action of one results in reaction of
others.
In perfect competition and monopoly there exists a
determinant solution to a firm's price and output decision-making. When
there are only a few sellers, however, each firm recognizes that its best
choice depends on choices made by rivals. There are dozens of alternative
oligopoly pricing theories and some economists claim there is no
determinant solution. In an oligopolistic market there is usually price
stability because of the interdependence of sellers. Interdependence
results in 'game playing' behavior whereby suppliers act like players in a
game acting and reacting to the moves of their competitors. Competition
tends to take place on a secondary level of: product differentiation;
technological innovation; and, diversification, i.e. producing more than
one commodity. In theory, oligopoly is considered inefficient because
price is higher and quantity lower than under perfect competition.
1. Cournot Solution
The Cournot Solution proposes that firms choose an output
that will maximize profits assuming the output of rivals is fixed. The
solution concludes that there is a determinant and stable price-quantity
equilibrium that varies according to the number of sellers. In effect each
firm makes assumptions about its rival's output that are tested in the
market. Adjustment or reaction follows reaction until each firm
successfully guesses the correct output of its rivals (M&Y 10th
Fig 12.4; M&Y 11th Fig. 12.1; B&B Fig. 13.1; B&Z not displayed)
2.
Sweezy Kinked Demand Curve Solution
The Sweezy solution postulates that oligopolists face two
subjectively determined demand curves that assume:
A key assumption is that rivals will choose the alternative
least favorably to the initiator. If initiator raises p, rivals will not
follow; if lowers price everyone follows. The result is p will be
relative rigid in the face of moderate changes in cost or demand (figure
not in text).
3. Other Solutions
There are a variety of models of oligopoly that attempt to
establish the price/quantity relationship resulting in profit
maximization. These include:
i - The Nash Equilibrium (p. 384);
ii - The Stackelberg Model (p. 389);
iii - The Betrand Model (p. 392); and,
iv - Collusion & Cartel Models (p. 383).
What this means is that there is no 'determinant solution'
for profit maximization under oligopoly. Complicating matters is the
fact that an oligopoly is usually accompanied by a large number of small
fringe producers called 'the competitive fringe'. Whatever
price the 'big boys' set, the fringe acts much like 'price-takers' but
with a latitude similar to monopolistic competitors, that is, they
can enjoy some measure of product differentiation. They also act
like a pool for the potential 'creative destruction' (a term introduced by
Joseph Schumpeter) of technological change. For a current
summary of the concept see: "Deconstructing
Creative Destruction with Dick Foster" by David Berkowitz,
eMarketeer, July 5, 2001).
4. Game Theory
The complexity of the oligopoly and the rich variety of
possible 'profit maximizing' outcomes has led economics to 'spin off' a
whole new field of thought called Game Theory (pp. 410 - 444).
Modern corporations and the military have adopted various conceptual
outputs of this field. Even the arts are involved in that actors are
often hired by businesses, governments, the military and other
institutions to 'role play' in games to hone the skills of various
personnel.
The impact upon the general public is also significant.
"Everyone plays games!"; "winners & losers"; "positive and negative
sum games". In many ways the contemporary ethos or zeitgeist is game
playing. For a brief history please see: AN OUTLINE OF THE
HISTORY OF GAME THEORY by Paul Walker
http://william-king.www.drexel.edu/top/class/histf.html.
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