Reading 16 The firm and market structures (cont.)

3. Olygopoly

  • Kinked demand curve model




Assumption:  Firm increase price, others will NOT followed.

                       Firm decrease price, others will followed decrease.

Q1: maximum profit level of unit

  • Cournot model : only 2 firms operating (Duopoly)

Only 2 firms A and B are similar and no change. A know the quantity of B and know total market supply A can calculate its quantity calculate its MR, MC.


  • Nash equilibrium model (prisoner’s dilemma)


Collusive agreements will be more successful when:

  • There are fewer firms.
  • Product, cost structures are similar.
  • Retaliation for cheating is more certain & more severe.
  • There is less actual or potential competition from outside the cartel.



  • Dominant firm model




There is a single firm, significantly large in the market (DF) dicide price

Other competitive firms: take price.

Based on graph above: the line cross the point of (MR ∩ MC) intersect DFdemand at d, from here we have: p* and q*. p* is the price dominant firm search.

  • Collusion and perfect competition

MCmarket is the supply curve.

Pcollusion > Pcompitition  and Qcollusion <  Qcompitition






     Figure 1: Single – price monopoly graph



Price discrimination work, sellers:

  • Face a downward sloping demand curve
  • At least 2 identifiable groups of customer with different price elastiscities of demand.
  • Prevent customers reselling.


Natural monopoly:

Example electric utility: initial cost very large, so MC for additional home low → the more provided, the lower the average cost.

The average cost of production for a single firm is falling throughout the relevant range of customers.

Average cost pricing:  + increase Q & decrease P

+ increase social welfare

+ ensure the monopolist a normal profit (P = ATC)

Marginal cost pricing

P below ATC → Government subsidy

Concentration ratio, Herfindahl – Hirschman Index (HHI)14

Where: Si: market share in percent

           N: number of firm in industry