An oligopoly exists when a market has a small number of suppliers, if there are only two suppliers is called duopoly. Therefore, the actions of any company can influence in the others, the companies take into account the actions of their rivals for maximize their profits.
Due to the limited number of suppliers can lead to a high degree of competitiveness, but the providers can partner to obtain greater incentives, setting higher prices, reducing the amount offered, dividing the market segments, etc. It can lead to a situation similar to the monopoly. But there are laws against such policies but also depends on the companies to follow these agreements. Therefore it could be described as an imperfectly competitive market.
Analyzing the situation of oligopoly we can define the following characteristics:
The most of the sales are made by a few companies, which can influence the selling price.
There may be a leader in prices and others are forced to follow him.
The decisions can be taken independently or through collaboration.
It is in an intermediate position between perfect competition and monopoly.
Because of the small number of companies and they handle the most of the market, it is really hard to market access for other companies.
There are two types of products: homogeneous (steel) and differentiated (automobiles).
The presence of marketing and advertising is considerable.
It is often abused the use of dumping, which consist in the lower prices even below of production cost.
Game Theory 博弈論
Now, we have the choice between cooperation and competition. Because if the companies work together they could produce a situation of monopoly but if they decide to compete they could approach a situation of perfect competition. While with the collaboration will be benefit for both companies, it is not always like as each of them individually could improve their situation in breach of the agreement.#p#分頁標題#e#
It is now when enter the Game Theory. It analyzes the way in which two or more agents choose their strategies simultaneously and it can affect each of the players.
The games are a set by agents and possible strategies for each of the agents, a set of utility functions and rules. These games can be cooperative or uncooperative.
The objective of game theory is to find a set of strategies that describes the action that is expected choose by a rational agent.
A solution of game theory would be the so-called Nash equilibrium, which, no agent could increase its profit given the strategy of the other participants. On the other hand, a player will have a dominant strategy when this will provide better results regardless of the strategies choose by the other participants.
This would lead to the paradox that benefits them individually to all if they cheat, but if all do cheat, the end result for all of them is worse than if they meet agreed. Therefore, it is a situation similar to that described by the prisoner's dilemma:
10 years for both
15 years prisoner A
0 years prisoner B
0 years prisoner A
15 years prisoner B
1 years for both
In this case the dominant strategy for each is to confess, it would be Nash equilibrium, while the optimal solution would be not confess.
With this we see that the agents pursuing their own interest and for this reason they get a worse outcome for both. So if the two prisoners were loyal to each other, the best option would be to cooperate between them choosing not to confess.
There is not a general theory of oligopoly, but there are models of oligopoly situations, which provide indications of possible types of behavior for each case.
We now discuss various oligopolistic models:
Cournot model, amount competition.
Bertrand model, prices competition.
Stackelberg model, leadership in quantities.
The Cournot model is based on the assumption that firms take their decisions simultaneously, which is not possible, the use of strategic behavior. Therefore, it is a simultaneous and no cooperative game. Consequently, each company will think that their opponents will continue producing the same amount regardless of what he does.#p#分頁標題#e#
Let's analyze the model, suppose that there are only two companies, each one consider the production of their rival, which means that it will not respond to their own production decisions.
If the total demand curve is:
The demand curve of firm 1 is obtained by subtracting :
The proposed idea is that firm 2 gets from the market demand curve, leaving the company 1 the rest.
To maximize the benefits for both firms equals the marginal cost with the marginal revenue. Let's start with the firm 1:
Developed of demand curve:
Total revenue function for firm 1:
Derive the above function and obtain the marginal revenue:
Equate the marginal revenue with the marginal cost as it will be the point where the benefit will be maximum:
And substitute the marginal revenue for then analytical expression and we will obtain:
Profit maximization leads to the reaction function of firm 1 that indicates the amount offered according to the amount offered by rival:
For firm 2 we use the same analytical procedure, which will result in the following expression:
If now we introduce the equation E.2 in the equation E.1 we get the following expression:
And now the same as above but in reverse and simplifying:
And as a final result, we obtain the function of the market demand curve:
In the Cournot model is not allocated efficiently productive resources and businesses are taking advantage of consumers with prices higher than marginal cost, however, is more efficient than monopoly.
The benefits range from those that would result in a monopoly situation (maximum) and a perfect competition (minimum).
For the client the only thing that counts is the difference in prices charged by companies. As Bertrand model is based on each firm must set their prices assuming the prices level of their rivals are fixed.
Let's explain it with an example, if firm 1 charge a Price, firm 2 has three options:
, firm 2 does not sell anything.
, they share the market demand.
, firm 2 captures all the demand.#p#分頁標題#e#
The best option would sell at a lower price than the competition which, so it will be the strategy choose by both companies.
In conclusion, in the Bertrand model:
There is no stable equilibrium.
The continued fall in prices will end at the point where price equals marginal cost.
The final settlement price and quantity is identical to that of perfect competition.
Stackelberg model 斯塔克爾貝格模型
In this model we analyze a non-cooperative sequential game. Now both companies contact more than once, so there are strategic behavior. It is therefore a dynamic game.
Suppose that firm 1 knows that firm 2 behaves like the Cournot model.
However, firm 1, the leader, knows that the quantity produced by firm 2, the follower, depending on their production. This relationship is contained in the reaction curve of firm 2. For this the leader replaces from the demand function for reaction function of firm 2:
We have the E.2 equation founded earlier in the Cournot model:
Now substitute from the demand curve for:
Developing and simplifying we obtain the following relation:
As the leader gets its total revenue and marginal, maximizing profits at the point at which equal the marginal revenue and marginal cost:
Let's check analytically:
Now we develop this expression:
If we want get the marginal revenue we must derivate respect of:
To maximize the benefits the marginal revenue must be equal than the marginal cost:
So after obtained their production, the firm 2 determines his production carrying to his reaction curve. The market price is obtained carrying and to the demand function:
In this situation the leader gets better results than in the Cournot model, since it is him who strategically manipulates the behavior of the follower, which is the one who gets worse.
The market will produce a higher total production and a lower price than the Cournot equilibrium.
It should be noted that the Stackelberg model only makes sense in the context of dynamic games, since if firms make decisions simultaneously there is no reason for that firm 1 behaves as a leader and firm 2 as a follower.
As the Stackelberg solution is not Nash equilibrium because it is not in the reaction function of firm 1. In other words, if firm 2 does not want to be a follower he knows that if he produces the amount of the Cournot equilibrium firm 1 has no choice that produce the same amount. And that is why we have proposed the model of Stackelberg as dynamic game in which an agent anticipates the other agent.#p#分頁標題#e#
In the initial period is firm 1, the leader, who decides to fix its production at a level, being in the post period where we really come into contact both companies.
Faced with the decision taken by firm 1 at the best that firm 2 can do at is produce. Thus, the solution reached is a Nash equilibrium, since firms do not take their decisions simultaneously, taking first-mover advantage.
The only problem may occur if the company decides to change its production level at t = 1, however this is not possible, since it must maintain its decision because the fixed costs are irrecoverable. This irreversibility means that the companies once made their decisions they cannot go back, so it ensures a balance in a dynamic game.
Cooperation in oligopoly.
One of the advantages in oligopolistic markets is the possibility of agreements between companies, eliminating the competition and benefiting to all participants.
However, not all deals are stable, as there are many incentives for both parties to not comply with those agreements, because if one of them breaches the agreement can get additional benefits.
In the other hand, in most cases the games are treated to the dilemma of the prisoner, described above, which it makes cooperation between the parties.
In the absence of cooperative agreements, firms compete with each other because they do not trust that the competence respect the agreements. In contrast, if firms can reach an agreement and respect it could reach the quantity and price of monopoly situation.
In an oligopolistic market companies that compete in it they have to worry about the rest of their rivals and those who may enter the market in the future.
Therefore, competition between companies is not limited to the existing, but also it must take into account potential competition. For this reason, many of the strategic decisions taken by firms concerning the establishment of barriers to entry, to prevent or reduce the risk posed by potential competition.
Among the barriers to entry that may exist in a given market the most important are: economies of scale, product differentiation, absolute cost advantages and legal barriers.
An important fact when considering the barriers to entry is to differentiate whether these occur naturally in the market or if they result from strategic decisions-man from existing businesses to eliminate potential competition. To analyze this case, we can use straight games, as companies who are considering entering a market take its decision after the old companies take their decisions.