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Oligopoly

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Oligopoly

* An oligopoly is a form of industry (market) structure characterized by a few dominant firms. Products may be homogeneous or differentiated. * The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others

Oligopoly Models

* All kinds of oligopoly have one thing in common:

* The behavior of any given oligopolistic firm depends on the behavior of the other firms in the industry comprising the oligopoly.

The Collusion Model

* A group of firms that gets together and makes price and output decisions jointly is called a cartel. * Collusion occurs when price- and quantity-fixing agreements are explicit. * Tacit collusion occurs when firms end up fixing price without a specific agreement, or when agreements are implicit.

The Cournot Model

* The Cournot model is a model of a two-firm industry (duopoly) in which a series of output-adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly.

The Kinked Demand Curve Model

* The kinked demand model is a model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink follows from the assumption that competitive firms will follow if a single firm cuts price but will not follow if a single firm raises price.

The Kinked Demand Curve Model

* Above P*, an increase in price, which is not followed by competitors, results in a large decrease in the firm’s quantity demanded (demand is elastic). * Below P*, price decreases are followed by competitors so the firm does not gain as much quantity demanded (demand is inelastic).

The Price-Leadership Model

* Price-leadership is a form of oligopoly in which one dominant firm sets prices and all the smaller...

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