ECON 1201 Lecture Notes - Lecture 22: Strategic Dominance, Microsoft Powerpoint, Quality Assurance
ECON 1201 – Lecture 22 – Oligopoly and Pricing Strategies
Recap
• Kinked demand curve creates price stability
• Two separate marginal revenue relationships
o Prices can be very inflexible as a result
• Because there are few sellers, there is a greater likelihood that companies can act as
one by reducing output and raising price
• Why we don’t see all oligopolies acting as cartels
o Cheating
o Entry
o Difficulty allocating output
o Antitrust laws
• Game theory
o Cooperative solution of higher prices does not occur because low prices (non-
cooperative solution) is the dominant strategy
▪ You can do better picking a low price whether the other party chooses a
high or low price
o Nash equilibrium
▪ Neither can improve or do better by making a different choice given what
the other party has done
▪ LP, LP is Nash equilibrium
Contestable Market
• Companies focus on whether or not there are barriers to entry in that industry
• The number of companies doesn’t matter, it’s about how many could be in the industry
• If contestable, other industries will take into account in their pricing decisions if a firm
can enter relatively quickly with little to no costs
• More contestable = more competitive
• Key: role of potential entry (can a competitor credibly enter a market and take business
away?)
What Determines the Contestability
• Fixed costs relative to revenue
o More fixed costs, less contestable, prices above costs
• Are there few or no legal barriers to entry?
• Can a new company replicate other firms in the industry?
• Brand loyalties
o Are consumers open to new competitors?
(PowerPoint, Slide 10)
• Firms keep prices closer to costs because they are worried about other entrants
Pricing Strategies
• How companies charge more than one price
o Price Discrimination
o Tying Arrangements
o Two Part Pricing
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ECON 1201 Full Course Notes
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