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Market Structure & Pricing (Oligopoly) - Coggle Diagram
Market Structure & Pricing
(Oligopoly)
A market structure characterized by so fes firms that each behaves interdependently
interdependent refers to no one buyers has control over price
Varieties
Undifferentiated
sell a commodity
product does not differ across supplies
steel
oil
Differentiated
sells products that differ across suppliers
CR - V vs Rav - 4
3. Economies of Scale
most important barrier to entry
cars sold between prices a & b will be at a loss
High cost of Entry
Crowding out the competiton
3 Approaches
a) Collusion & Cartels
Cartel
a group of firms that agree to coordinate pricing & production to reap monopoly profit
Collution
an agreement among firms to increase profit by
diving the market
fixing the price
To maximize profit
output must be allocated so that the MC for the final unit produced by each firm is identical
firm in the cartel
more firms make it harder to come to agreemnet
New entry
can't prevent new entry or force new entrants to join
Cheating
by pricing just below agreed price, a member can increase sales & profits
b) Price Leadership
Price leader
firm whose price is matched by other firms
an informal form of collusion
initiates any market price changes
c) Game Theory
analyzes ogopolistic behavior as a
series of strategic moves and
countermoves by rival firms
Oligopoly vs Perfect Competition(PC)
Price is usually higher under Oligopoly
higher profits under oligopoly
If firms collude
lower output than PC
hisher price than PC
