MGMG506 Thai Economy in Global Context PDF

MGMG506 Thai Economy in Global Context Slide: 5-1 Oligopoly  Book Chapter 17: Oligopoly PowerPoint Slides...

MGMG506 Thai Economy in Global Context Slide: 5-1 Oligopoly  Book Chapter 17: Oligopoly PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 2 product or service or otherwise on a password-protected website for classroom use. สินคาเหมือนกัน (identical)/ สินคาแตกตางกัน (differentiated) 3  Oligopoly Oligopoly – Only a few sellers – Offer either identical (homogeneous) or differentiated products – Price taker in case of identical products example: petroleum, ผูใหบริการเครือขายมือถือ Price maker in case of differentiated products example: cars, น้ําอัดลม – Difficult market entry – Interdependence 4  Interdependence Interdependence (การกระทําของบริษัทหนึ่งมีผลตอปฏิกิริยาของบริษัทอื่น เชน การ เพิ่มปริมาณการผลิต การปรับราคา เปนตน) – A condition in which an action by one firm may cause a reaction on the part of other firms – Your actions affect the profits of your rivals. – Your rivals’ actions affect your profits. – How will rivals respond to your actions? No single model. Usually analyzed by Game theory (ทางธุรกิจจะนําทฤษฎีเกมส มาใชในการวิเคราะหเพื่อวางกลยุทธ) – How people behave in strategic situations (มาจากพฤติกรรมและทางเลือกที่อาจเกิดขึ้นไดใน สถานการณนั้น) Choose among alternative courses of action Must consider how others might respond to the action he takes 5  Tension between cooperation and self-interest cooperation (การรวมมือกัน เชน รูปแบบ Cartel หรือการตกลงรวมกัน) – If cooperate, the group of sellers would be Acting like a monopolist (ทําเชนเดียวกับผูผูกขาด คือ ผลิตจํานวนนอย กําหนดราคาสูงกวา MC ทํา ใหทั้งกลุมไดกําไร) – Produce a small quantity of output – Charge P > MC – Maximize total group profit Collude and form a cartel, which determines – Total level of production – Quantity produced by each member © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 6 product or service or otherwise on a password-protected website for classroom use.  Tension between cooperation and self-interest Self-interest (ทําตามนโยบายของบริษัทตัวเอง ไมสนใจบริษัทอื่น) : – Powerful incentives not to cooperate or to cheat on a cartel – Difficult to agree on colluded price or production quota – Collusion not legally possible due to Antitrust laws – In case of NO Collusion: Lower price, higher quantity, and lower profit when compared to cooperation (monopoly) (ลดราคา เพิ่มปริมาณการผลิต กําไรต่ําลงเมื่อเทียบกับการรวมมือผูกขาด) Higher price, lower quantity, and higher profit when compared to competitive market (เพิ่มราคา ลดปริมาณการผลิต กําไรสูงขึ้นเมื่อเทียบกับตลาดแขงขัน) © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 7 product or service or otherwise on a password-protected website for classroom use.  Equilibrium for an Oligopoly Conflicting incentives – Better off cooperating and reaching the monopoly outcome, but – They pursue their own self-interest Do not end up reaching the monopoly outcome and maximizing their joint profit Each is tempted to raise production and capture a larger share of the market แตละบริษัทพยายามเพิ่มกําลังการผลิตเพื่อใหไดสวนแบงตลาดมากขึ้น ผลคือปริมาณการผลิต ในตลาดเพิ่มขึ้น และราคาตลาดลดลง – Total production rises, Price falls 8  Market size does matter The size of a market affects the outcome – As the number of sellers in an oligopoly grows larger It is getting harder to collude. Oligopolistic market - looks more like a competitive market Price - approaches marginal cost Quantity produced – approaches that of competitive market output level © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 9 product or service or otherwise on a password-protected website for classroom use.  Why Cartel Members May Cheat P 40 Profit from MC 35 Extra profit from Price & Cost per unit forming a cartel cheating a cartel 30 AC 25 MR2=Price set by a cartel 20 MR1= Price in a 15 competitive market 10 No economic profit in 5 competitive market 1 2 3 4 5 6 7 8 9 Q Competitive Cheat output level Output set by a cartel market output 10  Dominant strategy Dominant strategy (กลยุทธที่ดีที่สุดสําหรับตนเอง) –Strategy that is best for a player in a game regardless of the strategies chosen by the other players – กลยุทธที่ผูเลนคิดวาดีที่สุดในเกมสๆ หนึ่ง ไมคํานึงวาผูเลนรายอื่นจะเลือก กลยุทธใด 11  Prisoners’ Dilemma Prisoners’ dilemma (ความลําบากใจของนักโทษที่เขาตาจน) – Particular “game” between two captured prisoners – Illustrates why cooperation is difficult to maintain even when it is mutually beneficial – แสดงใหเห็นวา เหตุใดคนสองคนจึงอาจไมรวมมือกัน แมวาทั้งสองคนไดรับผลประโยชน มากที่สุดในการรวมมือกัน – นํามาอธิบายปรากฎการณการแขงขันระหวางสองคูแขงในธุรกิจ เชน การทํา cartel การประมูลสัมปทาน หรือในการแขงขันทางการเมือง 12 Figure 1 The Prisoners’ Dilemma Miss Y’s decision Confess (รับสารภาพ) Remain silent (ไม่ ปริปาก) Miss Y gets 8 years Miss Y gets 20 years Confess Mr.T’s Mr.T gets 8 years Mr.T goes free Decision Miss Y goes free Miss Y gets 1 year Remain silent Mr.T gets 20 years Mr.T gets 1 year In this game between two criminals suspected of committing a crime of corruption, the sentence that each receives depends both on his or her decision whether to confess or remain silent and on the decision made by the other © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 13 product or service or otherwise on a password-protected website for classroom use.  Prisoners’ Dilemma The prisoners’ dilemma – To confess is a dominant strategy for both players. (ถารับสารภาพติดคุก 8 ป ไมรับ สารภาพติดคุก 20 ป เพราะฉะนั้นการรับสารภาพเปน dominant strategy ของทั้งคู) – Because each pursues his or her own interests The two prisoners together reach an outcome that is worse for each of them (Outcome จาก การรับสารภาพของทั้งคู คือติดคุกคนละแปดป แทนที่จะเปนอิสระ ถาทั้งคูไมรับสารภาพ) However, it’s the best response from each player’s perspective, given what the other does. So, it’s also a Nash equilibrium (explained next). – Cooperation between the two prisoners is difficult to maintain (การรวมมือกันรักษาไว ไดลําบาก เพราะเปนสิ่งที่ขัดกับผลประโยชนของตัวเอง) Because cooperation is individually irrational 14  Collusion game among oligopolists Game oligopolists play – In trying to reach the monopoly outcome – Similar to the game that the two prisoners play in the prisoners’ dilemma Firms are self-interest – And do not cooperate Even though cooperation (cartel) would increase profits – Each firm has incentive to cheat © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 15 product or service or otherwise on a password-protected website for classroom use.  Oligopoly Game: Saudi Arabia and Kuwait Kuwait’s decision High production: 40M barrels Low production: 30M barrels Kuwait gets Kuwait gets High production: $1,600 profit $1,500 profit 40M barrels Saudi gets Saudi gets Saudi Arabia’s $1,600 profit $2,000 profit Decision Kuwait gets Kuwait gets Low production: $2,000 profit $1,800 profit 30M barrels Saudi gets Saudi gets $1,500 profit $1,800 profit Unit of profit: Billion $ In this game between Saudi Arabia and Kuwait, the profit that each earns from selling oil depends on both the quantity each country chooses to sell and the quantity the other chooses to sell. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 16 product or service or otherwise on a password-protected website for classroom use.  OPEC and the world oil market Organization of Petroleum Exporting Countries (OPEC) is a cartel – Formed in 1960: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela – By 1973: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon – Control about three-fourths of the world’s oil reserves © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 17 product or service or otherwise on a password-protected website for classroom use.  OPEC and the world oil market OPEC – Tries to raise the price of its product Coordinated reduction in quantity produced – Tries to set production levels for each of the member countries Problem – The countries want to maintain a high price of oil © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 18 product or service or otherwise on a password-protected website for classroom use.  OPEC and the world oil market Problem – Each member of the cartel Tempted to increase its production Get a larger share of the total profit Cheat on agreement OPEC - successful at maintaining cooperation and high prices – From 1973 to 1985: increase in price © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 19 product or service or otherwise on a password-protected website for classroom use.  OPEC and the world oil market Mid-1980s - member countries began arguing about production levels – OPEC - ineffective at maintaining cooperation – Decrease in price © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 20 product or service or otherwise on a password-protected website for classroom use.  Collusion can sometimes be maintained. Game of repeated prisoners’ dilemma – Repeat the game – Agree on penalties if one cheats – Both have incentive to cooperate – As long as the players care enough about future profits, they will choose to forgo the one-time gain from defection © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 21 product or service or otherwise on a password-protected website for classroom use.  Application of Dominant Strategy In a second-price auction, the highest bidder wins and pays a price equal to the second-highest bid. What is your bidding strategy? Prove that bidding true value is the weakly dominant solution of a second-price auction.  Limitations Limitation of the Dominant strategy equilibrium. 1. Sometimes, there’s just no dominant strategy. 2. The Dominant strategy may not exist. 23  Hawk-Dove (or Chicken) A\B Tough Concede Tough -100, -100 10, 0 Concede 0, 10 5, 5 Think of motor cyclists who compete every night to win a date by riding toward each other. The one who changes a course (concede) becomes a “Chicken” (loser). What is the Dominant strategy?  Nash Equilibrium Nash equilibrium – When economic actors interacting with one another, – each choose their best strategy – given the strategies that all the other actors have chosen. – What is the Nash equilibrium of the previous Chicken game? Dominant strategy equilibrium is always also a Nash equilibrium. Basically, Dominant strategy equilibrium is a subset of Nash equilibrium. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 25 product or service or otherwise on a password-protected website for classroom use.  Public Policy Toward Oligopolies Policymakers – Try to induce firms in an oligopoly to compete rather than cooperate Antitrust laws – Used to prevent mergers – Used to prevent oligopolists from colluding © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 26 product or service or otherwise on a password-protected website for classroom use.  An illegal phone call Robert Crandall - president of American Airlines Howard Putnam - president of Braniff Airways – Crandall: I think it’s dumb as hell... to sit here and pound the @#$% out of each other and neither one of us making a #$%& dime. – Putnam: Do you have a suggestion for me? – Crandall: Yes, I have a suggestion for you. Raise your $%*& fares 20 percent. I’ll raise mine the next morning. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 27 product or service or otherwise on a password-protected website for classroom use.  An illegal phone call – Putnam: Robert, we... – Crandall: You’ll make more money, and I will, too. – Putnam: We can’t talk about pricing! – Crandall: Oh @#$%, Howard. We can talk about any &*#@ thing we want to talk about. The Sherman Antitrust Act – Prohibits competing executives from even talking about fixing prices © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain 28 product or service or otherwise on a password-protected website for classroom use.  Price Rigidity One observed feature in an oligopoly market win differentiated goods is that – Prices tend to be stable for a long time. – Prices do not change even when costs increase or decrease to a certain extent. – Example: Coke vs. Pepsi We call this “Price Rigidity”. Explained in next slide by Sweezy (kinked-demand) model. 29