hubbard01_instructorppt13.ppt

Oligopoly:Firms in Less Competitive Markets,2 of 21,After studying this chapter,you should be able to:Show how barriers to entry explain the existence of oligopolies.Use game theory to analyze the actions of oligopolistic firms.Use a sequential games to analyze business strategies.Use the five competitive forces model to analyze competition in an industry.,Competing with Wal-Mart,LEARNING OBJECTIVES,In an oligopoly,a firms profitability depends crucially on its interactions with other firms.,3 of 21,Oligopoly,Oligopoly A market structure in which a small number of interdependent firms compete.The approach we use to analyze competition among oligopolists is called game theory.,4 of 21,Oligopoly and Barriers to Entry,Barriers to Entry,Barrier to entry Anything that keeps new firms from entering an industry in which firms are earning economic profits.,13-1,5 of 21,Oligopoly and Barriers to Entry,Barriers to Entry,Economies of scale Economies of scale exist when a firms long-run average costs fall as it increases output.,13-1,6 of 21,Oligopoly and Barriers to Entry,Barriers to Entry,In addition to economies of scale,other barriers to entry include:Ownership of a key inputGovernmentImposed BarriersPatent The exclusive right to a product for a period of 20 years from the date the product was invented.,7 of 21,Using Game Theory to Analyze Oligopoly,Game theory The study of how people make decisions in situations where attaining their goals depends on their interactions with others;in economics,the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.Key characteristics of all games:Rules that determine what actions are allowable.Strategies that players employ to attain their objectives in the game.Payoffs that are the results of the interaction among the players strategies.Business strategy Actions taken by a business firm to achieve a goal,such as maximizing profits.,8 of 21,Using Game Theory to Analyze Oligopoly,A Duopoly Game:Price Competition between Two Firms,Payoff matrix A table that shows the payoffs that each firm earns from every combination of strategies by the firms.,Collusion An agreement among firms to charge the same price,or to otherwise not compete.,13-2,9 of 21,Using Game Theory to Analyze Oligopoly,A Duopoly Game:Price Competition between Two Firms,Dominant Strategy A strategy that is the best for a firm,no matter what strategies other firms use.,Nash equilibrium A situation where each firm chooses the best strategy,given the strategies chosen by other firms.,In the film,A Beautiful Mind,Russell Crowe played John Nash,winner of the Nobel Prize in Economics.,A Beautiful Mind:Game Theory Goes to the Movies,13-1,10 of 21,Using Game Theory to Analyze Oligopoly,Firm Behavior and the Prisoners Dilemma,Cooperative equilibrium An equilibrium in a game in which players cooperate to increase their mutual payoff.,Noncooperative equilibrium An equilibrium in a game in which players do not cooperate but pursue their own self-interest.,Prisoners dilemma A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off.,11 of 21,Is Advertising a Prisoners Dilemma for Coca-Cola and Pepsi?,13-1,On eBay,bidding the maximum value you place on an item is a dominant strategy.,Is There a Dominant Strategy for Bidding on eBay?,13-2,Advertising is the optimal decision for both firms,given the decision by the other firm.,12 of 21,Using Game Theory to Analyze Oligopoly,Can Firms Escape the Prisoners Dilemma?,13-3,The airlines have trouble raising the price this business traveler pays for a ticket.,American Airlines and Northwest Airlines Fail to Cooperate on a Price Increase,13-3,13 of 21,Using Game Theory to Analyze Oligopoly,Cartels:The Case of OPEC,Cartel A group of firms that colludes by agreeing to restrict output to increase prices and profits.,13-4,Sustaining high prices has been difficult because members often exceed their output quotas.,14 of 21,FIGURE 13-4,Oil Prices,1972 to mid2009,Cartel A group of firms that collude by agreeing to restrict output to increase prices and profits.,Using Game Theory toAnalyze Oligopoly,Cartels:The Case of OPEC,The blue line shows the price of a barrel of oil in each year.The red line measures the price of a barrel of oil in terms of the purchasing power of the dollar in 2009.By reducing oil production,OPEC was able to raise the world price of oil in the mid-1970s and early 1980s.Sustaining high prices has been difficult over the long run,however,because members often exceed their output quotas.,Use game theory to analyze the strategies of oligopolistic firms.,13.2 LEARNING OBJECTIVE,15 of 21,Using Game Theory to Analyze Oligopoly,Cartels:The Case of OPEC,13-5,The equilibrium of this game will occur with Saudi Arabia producing a low output and Nigeria producing a high output.,16 of 21,Sequential Games,13-6,The best decision for Wal-Mart is to build a large store to deter Targets entry.,Deterring Entry,17 of 21,Is Deterring Entry Always a Good Idea?,13-1,In this case,Wal-Mart will build a small store and Target will enter.Deterrence is only worth pursuing if its costs are not too high.,18 of 21,Sequential Games,Bargaining,19 of 21,The Five Competitive Forces Model,13-7,20 of 21,Is Business Strategy More Important Than the Structure of the Airline Industry?,13-4,Southwests business strategy allowed it to remain profitable when many other airlines faced heavy losses.,21 of 21,Can We Predict Which FirmsWill Continue to Be Successful?,Unfortunately,Circuit Citys excellence as a company didnt last.,Use the five competitive forces model to analyze competition in an industry.,13.4 LEARNING OBJECTIVE,Is it possible to draw general conclusions about which business strategies are likely to be successful in the future?,YOUR TURN:Test your understanding by doing related problem 4.5 at the end of this chapter.,22 of 21,23 of 21,Hewlett-Packard Uses New Technology to Boost Sales of Personal Computers,AN INSIDE LOOK,Dell decides whether to sell touch-sensitive personal computers.,24 of 21,Barrier to entryBusiness strategyCartelCollusionCooperative equilibriumDominant strategyEconomies of scale,Game theoryNash equilibriumNoncooperative equilibriumOligopolyPatentPayoff matrixPrisoners dilemma,