Introduction………………………………………………………………………………………….3

1. The concept and signs of oligopoly………………………………………………………………..4

2. Types of oligopoly……………………………………………………………………………………6

3. Models of oligopoly……………………………………………………………………………………………7

Conclusion……………………………………………………………………………………...10

Introduction

Currently, one of the most common market structures are monopolies and oligopolies. However, monopolies remained in their pure form only in a few sectors of the economy. The most predominant form of modern market structure is oligopoly.

The term "oligopoly" is used in economics to describe a market in which there are several firms, each of which controls a significant share of the market.

In an oligopolistic market, several of the largest firms compete with each other and entry into this market of new firms is difficult. Products manufactured by firms can be both homogeneous and differentiated. Homogeneity prevails in the markets for raw materials and semi-finished products; differentiation - in consumer goods markets.

The existence of an oligopoly is associated with restrictions on entry into this market. One of them is the need for significant capital investments to create an enterprise in connection with the large-scale production of oligopolistic firms.

The small number of firms in the oligopolistic market forces these firms to use not only price, but also non-price competition, because the latter is more efficient under such conditions. Manufacturers know that if they lower the price, their competitors will do the same, which will lead to a drop in revenue. Therefore, instead of price competition, which is more effective in today's competitive environment, "oligopolists" use non-price methods of struggle: technical superiority, product quality and reliability, marketing methods, the nature of the services and guarantees provided, differentiation of payment terms, advertising, economic espionage.

For the disclosure of this topic, it is necessary to solve a number of problems:

1. Define the concept and signs of an oligopoly.

2. Consider the main types and models of oligopoly.

The concept and signs of oligopoly

Oligopoly is a type of imperfectly competitive market structure dominated by a very small number of firms. The word "oligopoly" was introduced by the English humanist and statesman Thomas More (1478-1535) in the world-famous novel "Utopia" (1516).

At the heart of the historical trend in the formation of oligopolies is the mechanism of market competition, which with inevitable force forces out weak enterprises from the market either by their bankruptcy or by absorption and merger with stronger competitors. Bankruptcy can be caused both by weak entrepreneurial activity of the enterprise's management, and by the impact of the efforts made by competitors against a particular enterprise. Absorption is carried out on the basis of financial transactions aimed at the acquisition of an enterprise, either in full or in part by buying a controlling stake or a significant share of the capital. This is the relationship between strong and weak competitors.

In the oligopolistic market, several large firms (2 - 10) compete with each other, and entry into this market of new firms is difficult. The products produced by firms can be both homogeneous and differentiated. Homogeneity prevails in the markets of raw materials and semi-finished products: ores, oil, steel, cement; differentiation - in consumer goods markets.

The existence of an oligopoly is associated with restrictions on entry into this market. One of them is the need for significant capital investments to create an enterprise in connection with the large-scale production of oligopolistic firms.

Examples of oligopolies include manufacturers of passenger aircraft, such as Boeing or Airbus, car manufacturers, such as Mercedes, BMW.

The small number of firms in the oligopolistic market forces these firms to use not only price, but also non-price competition, since the latter is more efficient under such conditions. Manufacturers know that if they lower the price, their competitors will do the same, which will lead to a drop in revenue. Therefore, instead of price competition, which is more effective in today's competitive environment, "oligopolists" use non-price methods of struggle: technical superiority, product quality and reliability, marketing methods, the nature of the services and guarantees provided, differentiation of payment terms, advertising, economic espionage.

From the foregoing, the main features of an oligopoly can be distinguished:

1. A small number of firms and a large number of buyers. This means that the market supply is in the hands of a few large firms that sell the product to many small buyers.

2. Differentiated or standardized products. In theory, it is more convenient to consider a homogeneous oligopoly, but if the industry produces differentiated products and there are many substitutes, then this set of substitutes can be analyzed as a homogeneous aggregated product.

3. The presence of significant barriers to entry into the market, i.e. high barriers to entry into the market.

4. Firms in the industry are aware of their interdependence, so price controls are limited.

Types of oligopoly

There are two types of oligopoly:

1. Homogeneous (non-differentiated) - when several companies producing homogeneous (non-differentiated) products operate on the market.
Homogeneous products - products that do not differ in the variety of types, types, sizes, brands (alcohol - 3 grades, sugar - about 8 types, aluminum - about 9 grades).

2. Heterogeneous (differentiated) - several companies create non-homogeneous (differentiated) products. Heterogeneous products - products that are characterized by a wide variety of types, types, sizes, brands.

3. Oligopoly of dominance - a large company operates on the market, the share of which in the total volume of production is 60% or more, and therefore it dominates the market. Several small companies operate next to it, which divide the remaining market among themselves.

4. Duopoly - when only 2 manufacturers or traders of this product work on the market.

Characteristic features of the functioning of oligopolies:

1. Both differentiated and non-differentiated products are produced.

2. Decisions of oligopolists regarding production volumes and prices are interdependent, i.e. oligopolies imitate each other in everything. So if one oligopolist lowers prices, then others will definitely follow suit. But if one oligopolist raises prices, then others may not follow his example, because. risk losing their market share.

3. In an oligopoly, there are very tough barriers to other competitors entering this industry, but these barriers can be overcome.

Oligopoly Models

There is no general model for the behavior of an oligopolist when choosing the optimal volume of production that maximizes profit. Since the choice depends on the behavior of the firm in response to changes in the actions of competitors, various situations may arise. In this regard, the following main models of oligopoly are distinguished:

1. Cournot model.

2. Oligopoly based on collusion.

3. Silent collusion: leadership in prices.

Cournot model (duopolies).

This model was introduced in 1838 by the French economist A. Cournot. A duopoly is a situation where only two firms compete with each other in the market. This model assumes that firms produce homogeneous goods and that the market demand curve is known. Firm 1's profit-maximizing output (£^1) changes depending on how it thinks firm 2's output (€?2) will grow. As a result, each firm builds its own response curve (Fig. 1).

Rice. 1 Cournot equilibrium

Each firm's response curve tells how much it will produce given its competitor's expected output. In equilibrium, each firm sets its output according to its own reaction curve. Therefore, the equilibrium level of output is at the intersection of the two response curves. This equilibrium is called the Cournot equilibrium. Under it, each duopolist sets the output that maximizes his profit, given the output of his competitor. The Cournot equilibrium is an example of what in game theory is called the Nash equilibrium (when each player does the best he can, given the actions of his opponents, in the end - no player has an incentive to change his behavior) (game theory was described by John Neumann and Oskar Morgenstern in Game Theory and Economic Behavior in 1944).

Collusion.

A conspiracy is an actual agreement between firms in an industry to fix prices and production volumes. Such an agreement is called a cartel. The international cartel OPEC, which unites oil exporting countries, is widely known. In many countries collusion is considered illegal, and in Japan, for example, it has become widespread. Conspiracy factors include:

the existence of a legal framework;

· high concentration of sellers;

Approximately the same average costs for firms in the industry;

Impossibility of entry of new firms into the market.

It is assumed that under collusion, each firm will equalize its prices both when prices go down and when prices go up. At the same time, firms produce homogeneous products and have the same average cost. Then, when choosing the optimal volume of production that maximizes profit, the oligopolist behaves like a pure monopolist. If two firms agree, then they build a contract curve (Fig. 2):

Rice. 2 Collusion contract curve

It shows the different combinations of outputs of the two firms that maximize profits.

Collusion is much more profitable for firms than not only perfect equilibrium, but also Cournot equilibrium, since they will produce less output and set the price higher.

Silent conversation.

There is another model of oligopolistic behavior based on a tacit secret agreement: this is "price leadership", when the dominant firm in the market changes the price, and all others follow this change. The price leader, with the tacit consent of the rest, is assigned the leading role in setting industry prices. The price leader can announce a price change, and if his calculation is correct, then the rest of the firms also increase prices. As a result, the industry price changes without collusion. For example, General Motors in the United States charges a certain price for its new model, while Ford and Chrysler charge roughly the same price for their new cars in the same class. If other firms do not support the leader, then he refuses to increase the price, and with the frequent repetition of such a situation, the leader in the market changes.

Conclusion

Assessing the importance of oligopolistic structures, it is important to note the following:

1. The inevitability of their formation as an objective process that follows from open competition and the desire of enterprises to achieve optimal production scales.

2. Despite both the positive and negative assessment of oligopolies in modern economic life, one should recognize the objective inevitability of their existence.

A positive assessment of oligopolistic structures is associated, first of all, with the achievements of scientific and technological progress. Indeed, in recent decades, in many industries with oligopolistic structures, significant progress has been made in the development of science and technology (space, aviation, electronics, chemical, oil industries). The oligopoly has huge financial resources, as well as significant influence in the political and economic circles of society, which allows them, with varying degrees of accessibility, to participate in the implementation of profitable projects and programs, often financed from public funds. Small competitive enterprises, as a rule, do not have sufficient funds to implement existing developments.

The negative assessment of oligopolies is determined by the following points. This is, first of all, that an oligopoly is very close in its structure to a monopoly, and, therefore, one can expect the same negative consequences as with the market power of a monopolist. Oligopolies, by concluding secret agreements, get out of state control and create the appearance of competition, while in fact they seek to benefit at the expense of buyers. Ultimately, this leads to a decrease in the efficiency of the use of available resources and a deterioration in meeting the needs of society.

Despite significant financial resources concentrated in oligopolistic structures, most of the new products and technologies are developed by independent inventors, as well as small and medium enterprises engaged in research activities. However, only large enterprises that are part of oligopolistic structures often have the technological capabilities for the practical implementation of the achievements of science and technology. In this regard, oligopolies use the opportunity to achieve success in technology, production and the market based on the developments of small and medium-sized businesses that do not have sufficient capital for their technological implementation.

Based on this, we can conclude that the oligopoly, although it does not satisfy the abstract conditions for the efficient use and distribution of resources, in reality it is effective, as it makes an important contribution to economic growth, actively participating in the research and development of new products and technologies, and also introducing these inventions into production.

Its most important features are:
a limited number of firms that have divided the industry market among themselves;
a significant concentration of production in individual firms, which makes each firm large relative to total market demand (this characteristic indicates that with small volumes of market demand, even a small firm can operate in conditions of oligopolistic interaction.);
limited access to the industry, which may be due to both formal (patents and licenses) and economic (scale economies, high entry costs) barriers;
The strategic behavior of firms, which is a fundamental characteristic of an oligopolistic market, means that firms aware of their interdependence build their competitive strategy taking into account the possible reaction of competitors to the actions taken.

In conditions of oligopolistic interaction (reacting to each other's actions), the peculiarity of the market is that firms are faced not only with the reaction of consumers, but also with the reaction of their competitors. Therefore, in contrast to the previously considered market structures, under an oligopoly, the firm is limited in its decision-making not only by the sloping demand curve, but also by the actions of competitors.
Firms operating in an oligopolistic market may choose different response strategies depending on the situation. Therefore, for oligopolistic markets, there is no single equilibrium point that firms strive for, and firms in the same industry can interact both as monopolists and as competitive firms.
When firms in an industry implement a cooperative interaction strategy, coordinating their actions by mimicking each other's pricing or competitive strategies, price and supply will tend to be monopoly. If firms follow a non-cooperative strategy, pursuing an independent strategy aimed at strengthening their own position, prices and supply will approach competitive ones.
Depending on the nature of the response to the actions of competitors in an oligopoly, various models of interaction between firms can be formed:
with a cooperative strategy consciously implemented by firms, the market is organized in the form of a cartel, which is characterized by limiting market supply and setting monopoly high prices;
A cartel is a group of firms united by an agreement on the division of the market and carrying out concerted actions in relation to supply (limiting output) and price (fixing) in order to obtain monopoly profits.

Despite the obvious benefit for the participants, the cartel is an unstable formation. First, there are always factors that counteract its occurrence. The greater the number of firms in an industry and the differences in their level of production costs, the more diverse their products and the lower the industry barriers, the more unstable industry demand, the more difficult it is to achieve coordination among firms and the likelihood of a cartel falling. Secondly, even if a cartel is formed, the problem of ensuring its stability arises, which is a much more difficult task than its creation. In this regard, the most important problem for the preservation of the cartel is the problem of monitoring the implementation of the agreement, especially since the cartel itself has a mechanism for its destruction.
The success of the cartel depends on the ability of its participants to identify and stop violations of the agreements reached. The practical implementation of such a requirement is feasible only if the procedures for monitoring and sanctioning compliance with the agreement do not require large costs, and the sanctions applied against violators exceed the benefits of violating the agreement.
under the conditions of the dominance of an individual firm in the market, a model of price leadership arises, in which the leading firm sets a price based on the demand for its products, and the rest of the firms in the industry accept it as given and act as perfectly competitive firms;
When an industry has a dominant firm that provides a significant share of the industry supply, other firms in the industry prefer to follow the leader in their pricing policy. The stability of the price leadership model is ensured not only by possible sanctions from the leader, but also by the interest of other market participants in the presence of a leader who takes on the burden of market research and development of the optimal price. The essence of the interaction of firms in this model is that the price that maximizes the profit of the price leader is a factor that sets the production conditions for the rest of the firms in the industry market. (Fig. 6.)
Knowing the market demand curve D and the supply curve (the sum of marginal cost curves) of other firms in the industry Sn, the price leader determines the demand curve for his products DL as the difference between industry demand and competitors' supply. Since at price P1 all industry demand will be covered by competitors, and at price P2 competitors will not be able to supply and all industry demand will be satisfied by the price leader, the demand curve for the leader's products DL will form in the form of a broken curve Р1P2DL.
Having a marginal cost curve MCL, the price leader will set a price PL that provides him with profit maximization (MCL = MRL). If all firms in the sectoral market accept the leader's yen as the equilibrium market price, then the supply of the non-new leader will be QL, and the supply of the remaining firms in the sector will be Qn(PL = Sn), which in total will give the total sectoral supply Qd = QL + Qn. With scrap, the supply of each individual firm will be formed in accordance with its marginal cost.
D Sn=?MCn

Qn ql qd
Rice. 6. Price leadership model
If there is a dominant firm on the market, market coordination is carried out by adapting firms to the price of the leader, which acts as a factor that sets the production conditions for the rest of the firms in the industry.
The price leader's competitive strategy is to focus on long-term profits by aggressively responding to competitors' challenges in terms of both price and market share. On the contrary, the competitive strategy of firms occupying a subordinate position is to avoid direct opposition to the leader by using measures (most often innovative ones) that the leader cannot respond to. Often the dominant firm does not have the capacity to impose its price on competitors. But even in this case, it remains for the firms in the industry a kind of conductor of pricing policy (announces new prices), and then they talk about barometric price leadership.
when firms enter into a conscious competition for sales volume, the industry will drift towards long-term to long-term competitive equilibrium;
the interaction of firms can take the form of a blocking pricing model if firms seek to maintain the current situation in the industry by increasing barriers to entry into the industry, selling products at prices close to the level of average long-term costs.
One of the manifestations of barometric price leadership is pricing, which limits the entry of new firms into the industry. A feature of oligopolistic interaction is that firms tend to maintain the status quo that has developed in the industry, in every possible way opposing its violation, since it is the equilibrium that has developed in the industry that provides them with the most favorable conditions for making profit. If barriers to entry into an industry are low, firms in the industry can artificially raise them by lowering the market price. For example (Fig. 7), by implementing a cooperative strategy, firms in the industry could earn economic profit by producing Q products and setting a price P. However, the presence of economic profit would become an attractive factor for new firms to enter the industry, which would be followed by a decrease in profit and possibly pushing some firms out of the industry.
Rice. 7. Block pricing model
Therefore, knowing the level of industry demand and costs, as well as estimating the minimum possible average costs of applicants for entry into the industry, firms operating in the industry can set the market price P1 at the level of the minimum long-term average costs, which will deprive firms of economic profit, but at the same time make penetration " strangers” into the industry is impossible. What price level firms actually choose depends on both their own cost curves and the potential of outsiders. If the costs of the latter are higher than the industry average, then the industry price will be set at a level above the minimum cost, but below the minimum cost that the firms threatening to enter the market can provide.
In an effort to consolidate their market power, oligopolistic interacting firms can coordinate their activities in order to counteract the entry of new firms into the market.
A similar practice can also be used to drive competitors out of an industry, when the dominant firm in the industry sets prices at a level below the minimum short-term average cost, hoping to compensate for the resulting losses in the long run.
when interacting firms produce standardized products, they can build their strategy based on the given output volume of competitors (Cournot model) or the invariance of their prices (Bertrand model);
Implementing cooperative strategies in practice is difficult and sometimes impossible. Therefore, in order to increase profits, firms engage in conscious competition for increasing market share, leading to "price wars".
Suppose an industry is represented by a duopoly, and firms have the same and constant average costs. (Fig. 8.) With industry demand Domp, firms will divide the market by producing Q products at a price of P, and will receive economic profit. If one of the firms lowers the price to P1, then by increasing the supply to q1, it will capture the entire market.
AC=MS Dneg

Q q1 q2 q3

Fig.8. The price war model
If the competitor also lowers the price, let's say to P2, then the entire market q2 will go to him, and the firm that has lost profits will be forced to go for a further price reduction. The competitor's response will cause the firm to lower its price until it falls to the level of average cost and further price reduction does not bring any benefits to the firm - Bertrand's equilibrium.
The Bertrand equilibrium describes a market situation in which, in a duopoly, firms compete by lowering the price of a good and increasing output. Equilibrium stability is achieved when the price is equal to marginal cost, i.e., competitive equilibrium is reached.
As a result of the “price war”, the output q3 and the price P3 will be at the level characteristic of the case of perfect competition, in which the price is equal to the minimum average cost (P3 = AC = MC), and firms do not receive economic profit.
When firms in an industry market do not coordinate their activities and are consciously competing for sales volume, equilibrium in the industry will be achieved at a price equal to average cost.
A price war is a cycle of gradually lowering the existing price level in order to force competitors out of an oligopolistic market.
Without a doubt, price wars are beneficial to consumers, as they lead to a redistribution of surplus wealth in their favor, at the same time they are burdensome for firms due to the significant losses incurred by all participants in the rivalry, regardless of the outcome of the struggle.
In addition, the very possibilities of using the price rivalry strategy in an oligopoly are severely limited. First, such a strategy is quickly and easily imitated by competitors, and it is difficult for the firm to achieve its goals. Secondly, the ease of adaptation of competitors is fraught with the threat of a lack of competitive potential for the firm. Therefore, in oligopolistic markets, preference is given to non-price methods of competition, which are difficult to copy.
The Cournot duopoly model demonstrates the mechanism for establishing market equilibrium under conditions when two firms operating in an industry simultaneously make decisions on the volume of output of a standardized good, based on a given output volume of a competitor. The essence of the interaction of firms is that each of them makes its own decision on the volume of output, taking the volume of production of the other constant (Fig. 9).
Assume that market demand is represented by curve D and firm MC has constant marginal cost. If firm A believes that another firm will not produce, then its profit-maximizing output will be Q. If it assumes that firm C will supply Q units, then firm A, perceiving this as a shift by the same amount of demand on its products D1 will optimize its output at the level of Q1. Any further increase in supply by firm B will be perceived by firm A as a shift in demand for its products D2 and will optimize output in accordance with this Q2. Thus, varying with firm 5's output assumptions, firm A's output decisions represent the response curve QA to changes in firm B's output. Proceeding similarly. firm B will have its own response curve QB to the proposed actions of firm A. (Fig. 10.)

Rice. Fig. 9. Firm response curves. 10. Establishing market equilibrium
under Cournot duopoly for Cournot duopoly
A duopoly is a market structure in which there are two firms in the market, the interaction between which determines the volume of production in the industry and the market price.
By reflecting the profit-maximizing output of one firm versus the output of another, response curves show how equilibrium output is established. If firm A produces QA1, then, according to its response curve, firm B will not produce, since in this case the market price of the product is equal to average cost and any increase in output will reduce it below average cost. When Firm A produces at QA2, Firm B will respond by issuing QB1. Reacting to the output of competitor QB1, firm A will reduce output to QA3. Ultimately, by setting output according to their response curve, firms will reach equilibrium at the point where these curves intersect, giving their equilibrium level of output Q*A and Q*B.
This is the Cournot equilibrium, which indicates the best position of the firm in terms of profit maximization for given actions of a competitor.
Cournot equilibrium is reached in the market when, in a duopoly, each firm, acting independently, chooses the optimal output that the other firm expects from it. The Cournot equilibrium occurs as the intersection point of the response curves of two firms. The response curve shows how the output of one firm depends on the output of another firm. However, the model itself does not explain how the equilibrium is reached, as it assumes the competitor's output to be constant.
If firms were producing at the level of marginal cost A = QA2; B = QB3 they would reach a competitive equilibrium in which they would produce more output, but would not receive economic profit. In this sense, achieving Cournot equilibrium is more profitable for them, since it allows them to extract economic profit. However, if firms were to collude and limit total output so that marginal revenue equals marginal cost, they would increase their profits by choosing the output combination on the QA2QB3 curve, called the contract curve.
in the case of uncertainty of market conditions and target preferences of firms, the interaction of firms can lead to several, moreover, different, equilibrium positions, depending on the chosen strategy of behavior.
The broken demand curve model reflects the case of price competition in an oligopoly, where it is assumed that firms always respond to price cuts by competitors and do not respond to price increases. The broken demand curve model was proposed independently by P. Sweezy, as well as by R. Hitch and K. Hall and in 1939, and then developed and modified by a number of researchers of an uncoordinated oligopoly.
Suppose similar firms sell an identical product at a price P, realizing Q units (Fig. 11). If one of the firms reduced the price to P1, then it could increase sales to Q1. But since other firms in the industry will follow suit, the firm will only be able to realize q1. If the firm raises the price (P2), then in the absence of a reaction from other firms, it realizes q2, and if there is such, the market supply will increase to Q2. Thus, the industry demand curve takes the form of a broken curve Dotr, the inflection point of which is the point of the prevailing industry price.

Rice. 11. Broken demand curve model
At the same time, it is easy to see that the demand curve for the products of each oligopolist tends to be highly elastic above the inflection point and inelastic below it, since Marginal revenue MR becomes sharply negative and firms' gross income will decline. This means that oligopolistic firms will refrain from unreasonable price increases for fear of losing their market share and profits, and from unjustified price cuts for fear of losing sales growth potential, market share and profits. Given the position of the marginal revenue curve MR, we can assume that even if marginal costs change within the vertical part of the marginal revenue curve (MC1, MC2), prices and sales volumes will not change.
In conditions of close oligopolistic interaction, competitors do not react to an increase in prices by an individual firm and adequately respond to its decrease.
In practice, the model does not always work this way, since not every price reduction is perceived by competitors as a desire to conquer the market. Since goods are easily replaceable, participants in an oligopolistic market tend to sell their product at the same prices under a pure oligopoly, and at comparable prices under a differentiated oligopoly.
By persisting in lowering prices, an oligopolistic firm risks causing a chain reaction of retaliatory measures from competitors and a decrease in demand for its products. And in the end, not to increase your profit, but to reduce it.
Basically the same thing happens when prices rise. Only in this case, the factor of uncertainty is no longer the “sanctions” of competitors, but the possible “support” on their part. They can join the price increase, and then the loss of customers by this company will be small (in the context of a general rise in prices, buyers will not find better offers and remain faithful to the company's goods). But competitors may not raise prices. With this option, the loss of popularity of goods that have risen in price compared to analogues will be significant.
Thus, both with a decrease and an increase in prices, the demand curve for the firm's products in an uncoordinated oligopoly has a broken shape. Before the active reaction of competitors begins, it follows one trajectory, and after it, it follows another.
We especially emphasize the unpredictability of the breaking point. Its position depends entirely on the subjective assessment of the actions of this company by competitors. More specifically: on whether they consider them acceptable or unacceptable, whether they will take retaliatory measures. Changes in prices and output in an uncoordinated oligopoly therefore become a risky business. It is very easy to cause a price war. The only reliable tactic is the principle of "Do not make sudden movements." It is better to make all changes in small steps, with a constant eye on the reaction of competitors. Thus, an uncoordinated oligopolistic market is characterized by price inflexibility.
There is another possible reason for price inflexibility, which the first researchers of the problem paid special attention to. If the marginal cost (MC) curve crosses the marginal revenue line along its vertical section (and not below it, as in our figure), then a shift in the MC curve above or below its original position will not entail a change in the optimal combination of price and output. That is, the price ceases to respond to changes in costs. Indeed, until the point of intersection of marginal cost with the line of marginal revenue does not go beyond the vertical segment of the latter, it will be projected onto the same point on the demand curve

In economic theory, much attention is paid to the problems of market structure. As you know, there are perfect and imperfect competition. If perfect competition is a somewhat idealized model of market structure, then imperfect competition is quite real.

Imperfect competition includes oligopoly, monopolistic competition, and monopoly. In this paper, we focus on oligopoly.

An oligopoly is a market situation in which a few large firms dominate an industry.

It is believed that the term "oligopoly" was introduced into economic literature by the English utopian socialist Thomas More (1478-1532). The term comes from two Greek words: oligos - several; roleo - trade.

According to some sources, the term "oligopoly" was introduced into scientific circulation by the English economist E. Chamberlin.

In an oligopolistic market, competing firms apply price controls, advertising, and output. They behave like armies on the battlefield. The relationship of oligopolistic firms is manifested in various forms of their behavior from price wars to collusion. In the oligopoly model, the firm has the ability to implement the optimal policy, taking into account the actions of its competitors.

In recent years, the state has paid increased attention to the problems associated with the state of competition, as well as the suppression of violations of antitrust laws. The antimonopoly legislation has been updated, the sanctions for its violation have been significantly tightened.

The relevance of the problem lies in the fact that in the conditions of the Russian economy, the oligopoly significantly affects the development of the country. This is especially true in today's crisis, when there is a redistribution of property, a reduction in market players, and various mergers and acquisitions. The task of the Federal Antimonopoly Service is to prevent the emergence of new monopolistic and oligopolistic structures, collusion, price increases, etc.

The object of study in our work is the oligopolistic market.

The subject of the study is the economic relations that arise between the subjects of the oligopolistic market, the state and other firms in the field of production, pricing, and marketing.

The aim of our work is to analyze oligopoly models.

To achieve this goal, it is necessary to solve the following tasks:

Consider the theoretical foundations of oligopoly;

To identify the reasons for the formation and differences of the oligopoly;

Describe the main theories of oligopoly;

Conduct a comparative analysis of oligopoly models.

The theoretical basis for writing the term paper was the work of Ivashkovsky S.N., Nosova S.S., Gryaznova A.G., Checheleva T.V., M.I. Plotnitsky, I.E. Rudanova. The work also used the journals "Society and Economics", "Economic Issues", as well as Internet sources.

1 THEORETICAL FOUNDATIONS OF OLIGOPOLY

1.1 The essence of an oligopoly

Oligopoly is a fairly common, most complex and least predictable structure. A small number of firms competing with each other and a large number of consumers makes it possible for oligopolists to explicitly or implicitly coordinate their actions and act as a single monopoly. A feature of an oligopoly is that each manufacturer must make a decision taking into account the possible response from competitors.

The word "oligos" in Greek means little. Oligopoly is the dominant modern market structure. It is characterized by the fact that only a few firms (up to 10-15) produce all or a significant part of the products, there are a large number of consumers on the market.

An oligopoly is a market structure in which there are several sellers and the share of each of them in the total sales in the market is so large that a change in the quantity of the product offered by each of the sellers leads to a change in price.

An oligopoly is a situation in which the number of firms in the market is so small that each must take into account the reaction of competitors when formulating its pricing policy. An oligopoly can be defined as a market structure in which the markets for goods and services are dominated by a relatively small number of firms producing homogeneous or differentiated products.

The number of oligopoly subjects can be different. It all depends on the concentration of sales in the hands of a particular company. According to some economists, oligopolistic structures include such markets, which are concentrated from 2 to 24 sellers. If there are only two sellers in the market, this is a duopoly, a special case of an oligopoly. The upper limit is conditionally limited to 24 economic entities, since, starting from the number 25, the structures of monopolistic competition are counted.

An oligopoly has the following features:

The presence of several firms, a small number of manufacturers;

Price control limited to mutual dependency or significant collusion;

The presence of significant economic and legal barriers to entry into the industry (primarily economies of scale, patents, ownership of raw materials);

Interdependence, involving the response of a competitor, especially when pursuing a pricing policy;

Non-price competition, especially when differentiating prices.

Many of these features are also characteristic of other market structures. Therefore, it is impossible to construct a single model of an oligopoly.

An oligopoly can be rigid, when two or three firms dominate the market, and vague, in which six or more firms share 70-80% of the market.

From the point of view of the concentration of sellers in the market, oligopolies can be divided into dense and sparse. The former include such sectoral structures, where two to eight sellers are represented, the latter - more than eight business entities. In the case of a dense oligopoly, various kinds of collusion are possible regarding the coordinated behavior of sellers in the market due to their limited number. With a sparse oligopoly, this is practically impossible.

From the point of view of the features and nature of the products produced, oligopolies are divided into homogeneous and differentiated. The former are associated with the production and supply of standard products (steel, non-ferrous metals, building materials), the latter are formed on the basis of the production of a diverse range of products. They are typical for industries in which it is possible to differentiate the production of goods and services offered.

Oligopoly is more common in industries where large-scale production is more efficient and there are no wide opportunities for differentiation of an industry product. This situation is typical for the manufacturing, mining, oil refining, electrical industries, as well as for wholesale trade.

In an oligopoly, there is not one firm in the industry, but a limited number of competitors. Therefore, the industry is not monopolized. By producing differentiated products, firms forming an oligopoly compete with each other using non-price methods, and respond to changes in demand mainly by changing the volume of production.

The behavior of the oligopoly in relation to price and output varies. Price wars bring prices to their level at competitive equilibrium. To avoid this, oligopolies may enter into secret cartel-type agreements, secret gentleman's agreements; to coordinate their behavior in the market with the behavior of the leader in the industry.

An oligopoly, in determining the price and volume of production, takes into account not only the behavior of consumers (as is done in other market structures), but also the reaction of its competitors. The dependence of the behavior of each firm on the reaction of competitors is called oligopolistic relationship.

The relationship of the subjects of the oligopoly is especially clearly manifested in the pricing policy. If one of the firms lowers the price, others will immediately respond to such an action, because otherwise they will lose buyers in the market. Interdependence in actions is a universal property of an oligopoly.

Firms are interconnected in terms of determining their sales volumes, production volumes, the amount of investments, and the costs of advertising activities. For example, if a firm wants to launch a new product or a new model of a product, then it makes every effort to advertise that product. But at the same time, the firm must be aware that it is being watched by other oligopolistic firms. And in the case of advertising campaigns, competitors will similarly begin to behave. They will also create a similar product or model.

This situation is determined by the fact that all firms understand that the goals, objectives, decisions of competing companies are determined by the behavior of other firms. And when making decisions, it is necessary to understand this and expect responses from a competitor.

At the same time, oligopolistic interdependence is both positive and negative. Oligopolistic firms can unite their efforts in the fight against others, turning into a semblance of a pure monopoly, achieving the complete disappearance of competitors in the market, or they can fight against each other, turning the market into a semblance of a market of perfect competition.

The latter option is most often implemented in the form of a price war - a gradual reduction in the existing price level in order to oust competitors from the oligopolistic market. If one firm cuts its price, then its competitors, feeling the outflow of buyers, in turn, will also lower their prices. This process can take place in several stages. But price reduction has its limits: it is possible until all firms have prices equal to average costs. In this case, the source of economic profit will disappear and a situation close to perfect competition will reign in the market. From such an outcome, consumers, of course, remain in a winning position, while producers, one and all, do not receive any gain. Therefore, most often the competitive struggle between firms leads them to make decisions taking into account the possible behavior of their rivals. In this case, each of the firms puts itself in the place of competitors and analyzes what their reaction would be.

The mechanism of pricing in an oligopoly has two interrelated features. This is, firstly, the rigidity of prices, which change less frequently than in other market structures, and, secondly, the consistency of the actions of all firms in the field of pricing.

Pricing policy in an oligopoly is carried out using the following basic methods (some economists consider them principles): price competition; collusion about the price; leadership in prices; price cap .

Price competition in an oligopoly is restrained. This is due, firstly, to weak hopes for achieving market advantages over competitors, and secondly, to the risk of unleashing a price war, which is fraught with negative consequences for all its subjects.

Collusion in pricing allows oligopolists to reduce uncertainty, generate economic profits, and prevent new competitors from entering the industry. Oligopolies agree to maximize profits on a limited scale, sometimes even reducing them to zero in order to block the entry of new producers into the industry.

Price leadership develops in a situation where the price increase or decrease by the firm that dominates the oligopoly is supported by all or most of the companies in the market. In an oligopoly, as a rule, there is a large firm acting as a price leader. Price changes occur only if there are noticeable deviations in the cost of certain factors of production or changes in the conditions of the enterprise or output.

A price markup (usually a certain percentage) is added to the average total cost of production. It is designed to take into account actual or potential competition, financial, economic and market conditions, strategic goals, etc. This principle is known as "cost plus". The cape provides profit, determines the behavior and actions of the company.

Oligopolies have positive and negative consequences. The following points can be noted as positive:

Large firms have significant financial opportunities for scientific developments, technical innovations;

The competitive struggle between firms that are part of the oligopoly contributes to the development of scientific and technological progress.

These positive aspects were noted by I. Schumpeter and J. Galbraith, who argued that large oligopolistic firms are able to be technically progressive and finance research and development work to achieve high rates of scientific and technological progress.

According to other economists, the advantages of an oligopoly are the absence of the destructive power of competition that exists in a free market, lower prices and higher product quality than in a monopoly; the difficulty of outside firms penetrating into oligopolistic structures due to economies of scale.

Finally, economists also note the fact that, in general, oligopolistic monopolies are necessary for society. They have an exceptional role in accelerating scientific and technological progress, as they are able to finance expensive scientific projects.

The negative aspects of an oligopoly come down to the following:

Oligopolies are not so afraid of competitors, since it is almost impossible to penetrate the industry. Therefore, they are not always in a hurry to introduce new equipment and technologies;

By entering into secret agreements, oligopolies seek to benefit at the expense of buyers (for example, increase product prices), which reduces the level of satisfaction of people's needs;

Oligopolies hold back scientific and technological progress. Until the maximization of profits on previously invested large capital is achieved, they are in no hurry to introduce innovations. This prevents obsolescence of machines, equipment, technologies and products.

1.2 Reasons for becoming And about oligopoly differences

There are the following reasons for the formation of an oligopoly:

Possibility in some industries of efficient production only at large enterprises (scale effect);

Ownership of patents and control over raw materials;

Absorption of weak firms by stronger ones. Such a takeover is carried out on the basis of financial transactions aimed at acquiring an enterprise in whole or in part by buying a controlling stake or a significant share of the capital;

The effect of the merger, which is usually voluntary. When several firms merge into one, a new firm can achieve a number of advantages: the ability to control the market, price, buy raw materials at lower prices, etc.;

Scientific and technological progress, which is associated with a significant expansion of production in order to realize economies of scale.

The differences on which the model of an oligopoly as a special type of market structure is based are few and more realistic than the assumptions underlying models such as perfect competition or monopoly.

1. Influence of the concept of product homogeneity. If in the model of perfect competition the homogeneity of products manufactured (sold) by different economic agents is one of the most important assumptions, and heterogeneity, or differentiation, of products is the defining assumption in the model of monopolistic competition, then in the case of an oligopoly, products can be both homogeneous and heterogeneous. . In the first case, one speaks of a classical, or homogeneous, oligopoly, in the second, of a heterogeneous, or differentiated, oligopoly. In theory, it is more convenient to consider a homogeneous oligopoly, but if in reality the industry produces a differentiated product (a set of substitutes), we can consider this set of substitutes as a homogeneous aggregated product for analytical purposes.

An oligopoly is called classical (or homogeneous) if firms in the industry produce homogeneous products, and differentiated (or heterogeneous) if firms in the industry produce heterogeneous products.

2. Few sellers opposed by many small buyers. This means that buyers in the oligopoly market are price takers, the behavior of an individual does not affect market prices. On the other hand, the oligopolists themselves are price seekers, the behavior of each of them has a significant impact on the prices that rivals can receive for their products.

3. Opportunities to enter the industry (to the market) vary widely: from completely blocked entry (as in the monopoly model) to relatively free entry. The ability to regulate entry, as well as the need to take into account the possible reaction of rivals when making decisions, forms the strategic behavior of oligopolists.

2 Basic theories of oligopoly

The most pronounced form of implementation of cooperative behavior is a cartel, which is an agreement on the parameters of an industry supply. The tendency of firms to coordinate their actions through a formal agreement on the volume of output and the price of the product produced by the industry is due to the difficulty in diagnosing the reaction of competitors. The content side of the cartel agreement is the limitation of industry output to a level that ensures that firms in the industry receive monopoly profits, which is achieved by coordinating the output of individual firms to volumes that would collectively ensure the establishment of monopoly equilibrium.

A cartel is a group of firms united by an agreement on price and market division between participants in order to obtain monopoly profits.

Organizationally, a cartel can take different forms. Firms may limit themselves to entering into a price agreement, aiming to avoid price competition, but leaving the possibility of non-price competition for market share. A more rigid form of cartel is the establishment of production quotas, supplemented by control over all types of competitive activity. A cartel can be implemented in the form of a specially created sales organization, which, buying up products from individual manufacturers at an agreed price, will then sell these products, taking into account coordination.

If there are two firms in the industry market - A and B, then the market equilibrium will be established based on the position of the market demand curve D 0 Tp and the industry marginal production cost curve, which are determined by horizontal summation of the marginal costs of firms (MS A + MS B). If firms operate in conditions of pure competition, then the industry will be in equilibrium at a price P k and output Q k . At this price, firm A will break even, issuing q A k , and firm B, issuing q, will receive a small profit, the value of which is equal to the area of ​​the dark-colored rectangle. Firms can improve their position if they reduce their total output to an amount that maximizes industry profits, that is, for which the equality MR = (MC A + MC B) is satisfied. With the volume Q kr and the corresponding price P kr, the sectoral profit will be maximum. However, this outcome is only possible if firms reach an agreement to maintain industry output at a level that maximizes industry profits. Consequently, the main task is to distribute production quotas among firms in such a way that their total output is equal to Q kr . Such quotas are determined based on the intersection of the horizontal line obtained from the intersection of MR = (MC A + MC B) with each firm's marginal cost curve. As a result, the production quota of firm A will be q A kr , and the quota of firm B will be q B kr . By selling the product at the same price P kr , both firms will improve their position. Firm A will earn an economic profit equal to the area of ​​the shaded rectangle. Firm B will increase its profits, as evidenced by the excess of the area of ​​the shaded rectangle over the area of ​​the dark-colored rectangle.

With a large number of firms and significant differences in the market shares they control, reaching an agreement on price and volume is extremely difficult. The greater the heterogeneity of the product produced by firms in the industry, the weaker the incentives for the implementation of a joint strategy. When industry barriers are low and cannot prevent “foreigners” from entering the market, the cartel agreement loses its meaning, since it can be destroyed at any time as a result of an outsider, that is, a firm that is not part of the cartel, entering the market. If firms have significant excess capacity, they are tempted to use that capacity and thus violate the terms of the agreement. When industry demand rises, firms have the opportunity to exercise market power without resorting to cartel agreements. With high rates of scientific and technological progress, the value of the cartel agreement is sharply reduced, since firms can easily get around it, using the opportunities that have opened up for restructuring technology or bringing a new product to the market. The nature of the state's antimonopoly policy is also of significant importance: the more stringent such a policy, the less likely cartels will appear, and vice versa.

Secondly, even if a cartel is formed, the problem of maintaining its stability arises, which is a much more difficult task than its creation. There are many reasons for the instability of cartel agreements. First of all, the target preferences of firms may differ, some of which will be focused on achieving short-term goals, while the other part will pursue long-term goals. All this will form grounds for violating the cartel agreement. The reasons for the instability may be rooted in the difference in assessments of the validity of the parameters of the cartel agreement by individual firms. If firms have significant differences in production costs or in market shares controlled by each firm, then it will be difficult for them to reconcile equilibrium price and volume. For a higher cost firm (MS A) the optimal price would be P A at quantity Q A , while a lower cost firm (MS B) prefers a lower price P B with more output Q B . A similar problem arises in the case of the same costs (MC A = MC B), but with different market shares D A and D B . Firm B considers as the optimal price R B, which ensures its profit maximization. However, for firm A, given the demand for its product (D A), such a price is unacceptable, as it leads to an unreasonable reduction in output and profits.

The general conclusion that follows from the foregoing is that the success of the cartel's activities depends on the willingness of its members to follow the agreements reached, as well as their ability to identify and effectively suppress the actions of violators. Turned into a practical plane, such a requirement is feasible only if three conditions are met. The first is that the procedures for monitoring compliance with the agreement should be cost-effective, that is, do not require large expenditures. As such, control prices, a territorial or segmental division of the market, and the creation of a common sales company can be used. The second condition is related to the speed of detection of violations, which depends on the availability, reliability and speed of obtaining information: the more firms are included in the cartel, the more differentiated is the circle of consumers of the product of the industry and the more diverse the contracts used, the more difficult it is to identify violators. The third condition is the effective effectiveness of the sanctions applied against violators, which must exceed the benefits received from the violation of the agreement. Sanctions can take the form of fines, quota limits, and "punishment in kind," where the cartel drastically lowers prices and expands production in order to force violators out of the industry's market.

Since it is common practice for modern economies to ban and legally

persecution of cartel agreements, the opportunities to implement cooperative behavior in this form are extremely difficult. Meanwhile, in an oligopolistic market, firms can coordinate their actions implicitly. One form of veiled cooperative behavior is price leadership.

Price leadership takes place when a firm operates in the industry market that has strategic advantages over its competitors. The firm may have advantages in terms of cost or product quality. The determining factor, however, is its control of a significant share of the sectoral market, which ensures its dominant position. The dominant position in the market allows the leading company, on the one hand, to obtain more complete information about the market, and on the other hand, to ensure price stability by controlling a significant share of the market supply. The mechanism of the price leadership model is that the leader firm sets the market price for the product, taking into account the prevailing market parameters and the goals pursued, while the rest of the industry firms (followers) prefer to follow the leader in their pricing policy, taking its price as a given one. .

Under conditions of price leadership, market coordination is achieved by adjusting firms to the price set by the leader, which acts as a factor that sets the production conditions for all firms in the industry market.

In the absence of a dominant firm on the market, price leadership can be realized by combining several firms into a group pursuing an agreed pricing policy.

The implementation of the price leadership model requires certain prerequisites. The leader controls a significant share of the market supply and has significant advantages over followers. It is able to determine the industry demand function and the distribution of production capacities in the industry. At the same time, the essence of oligopolistic interaction in this model is that the price that maximizes the profit of the price leader acts as a factor that sets the conditions for optimizing production for other firms in the industry market. Therefore, a distinctive feature of this model of interaction is the sequence of decision-making, and not their simultaneity, as was the case in the previous model.

Knowing the market demand curve D and the follower supply curve S n =XMC n , the price leader determines the demand curve for its product D L as the difference between industry demand and competitors' supply. Since at the price ¥ x all industry demand will be covered by competitors, and at price P 2 competitors will not be able to supply and all industry demand will be satisfied by the price leader, the demand curve for the leader’s products (D L) will take the form of a broken line Pl. By optimizing its output in accordance with the principle of profit maximization MR L = MC L , the price leader will set the price P L with the output volume q L . The price set by the leader is accepted by the followers as the equilibrium price, and each of the follower firms optimizes its output in accordance with this price. At price P L the total supply of followers will be q Sn , which follows from P L = S n .

The behavior of the leader firm is determined by factors such as the size of the industry share of the leader, the difference in production costs between the leader and followers, the elasticity of demand for the leader's product, and the elasticity of supply of followers. The most significant parameter in the above list is the parameter of production costs: the greater the difference in the average costs of the leader and followers, the easier it is for the leader to maintain price discipline. Moreover, the leader's advantage in costs can be relative, as a result of economies of scale, or it can be absolute, when the leader uses more efficient technology or has access to cheaper resources. Absolute cost advantages allow the leading firm to literally dictate market conditions to its followers.

Assume that with market demand D, the demand for the leader's product is represented as D L , and its production costs as MC L =AC L . The leading firm has an absolute advantage in the level of average costs - AC L

However, having an absolute cost advantage, the leader can set the price below the level of the minimum values ​​of the average costs of the followers, up to the level of his own average costs, for example P 1 . At this price, there is no optimal output for follower firms, since they will incur a net loss at any output. Ultimately, followers will be forced out of the market, which in this case is completely monopolized by the leader firm. Having eliminated the competitive environment, the leader captures all market demand and sets a monopoly price Pm, which allows him to increase profits by an amount. At the same time, despite the seemingly most favorable outcome for the leading firm, such behavior also carries some threats in the long run. Providing the leader with monopoly profits, the price Pm simultaneously sharply lowers the industry entry barrier, creating not only favorable opportunities for the resumption of activities in the industry by competitors, but also provoking an increase in their supply. A significant expansion of industry supply with unchanged market demand can lead to such a drop in the price of the industry product, which will not only deprive the leader of profits, but also the very opportunity to conduct business due to high fixed costs. It is no coincidence that such behavior of the leading firm is called “suicidal”. Therefore, the leading firm, regardless of its advantages, is more likely to be satisfied with a small stable profit and will regulate the price level in such a way as to maintain barriers to entry at a high level, that is, to pursue a “penetration-restricting” pricing strategy.

The price leader's competitive strategy is to focus on long-term profits by aggressively responding to competitors' challenges in terms of both price and market share. On the contrary, the competitive strategy of firms occupying a subordinate position is to avoid direct opposition to the leader by using measures (most often innovative ones) that the leader cannot respond to. Often the dominant firm does not have the capacity to impose its price on competitors. But even in this case, it remains a kind of conductor of pricing policy (announces new prices), and then they talk about barometric price leadership.

If we evaluate the market model with price leadership in terms of economic efficiency, then the result will depend entirely on what is the source of leadership in this market. When cost advantage is the source of dominance, price leadership will provide a more efficient outcome than would be achieved with perfect competition. When price leadership is based on cost advantage, it ensures that market equilibrium is achieved with an industry supply that is larger than the competitive one. But when price leadership is based solely on market control (the firm has a significant share of the industry supply), the result of the market functioning with a price leader will be worse than it would be under perfect competition.

A feature of oligopolistic interaction is that firms tend to maintain the status quo that has developed in the industry, in every possible way opposing its violation, since it is the equilibrium that has developed in the industry that provides them with the most favorable conditions for making profit. In this regard, the greatest threat to interacting oligopolistic firms is the penetration of “newcomers” into the industry market. There are several reasons for this. First, the entry of a new firm into the market disrupts the existing equilibrium, which will inevitably lead to increased competition among all participants. Secondly, "newbies" are not burdened with obligations in relation to the oligopolistic agreement that has developed in the industry market. Thirdly, they may not share the strategy developed by the "old" firms at all, but, on the contrary, behave aggressively. Finally, "newcomers" may bring with them more advanced technology and improved products, which will significantly weaken the competitive position of firms in the market. Therefore, one of the most important concerns of participants in oligopolistic interaction is the creation of conditions that reduce the likelihood of new firms entering the market, in relation to which industry barriers play a primary role.

Industry barriers to entry can be raised in a variety of ways. But the most affordable, and most importantly, the most effective is the price. If barriers to entry are low, firms in the industry can artificially raise them by lowering the market price. For example, by implementing a cooperative strategy, firms in the industry could secure economic profits (shaded box) by producing Qi products at a price of P 3 . However, the presence of economic profit would be an attractive factor for the entry of new firms into the industry. If the outsider's costs are described as LRAC A , then at the price P 3 his entry will become inevitable, since such a price carries the profit potential for the firm entering the market.

Knowing the level of industry demand (D) and costs (LRAC 0), as well as estimating the level of entry costs, firms operating in the industry can set the market price at the level of the minimum long-term average cost of an outsider, that is, P 2 . In this case, the oligopolists will lose part of the profit (horizontally shaded rectangle) - although they compensate for some of the losses, equal to the area of ​​the vertically shaded rectangle, by increasing their supply to Q 2 . But firms can expand supply to Q 3 by setting the price of the product at the level P l corresponding to their minimum average long-run production costs. Such a consensus decision will deprive firms of economic profit (industry economic profit is zero). But at the same time, it will make the penetration of “strangers” into the industry impossible. And not only because of the unprofitability of production for an outsider (P 3

It is clear that the decision to choose a price level blocking entry will depend on two circumstances - the level of oligopolists' own costs and the cost potential of "outsiders". If the costs of the latter are higher than the industry average, then the industry price will be set at a level above the minimum production costs of firms operating in the market, but below the minimum costs at which firms that threaten to enter the market can produce. Even if the price is set at the minimum average long run cost, firms in the industry will earn an accounting profit. More often than not, firms prefer profit sustainability to profit margins, which means that their decisions will tend to price at a level that is guaranteed to discourage other firms from entering the market.

2.2 Models of non-cooperative behavior: "price war" and

competitive cooperation

- Responsive interaction

Implementing cooperative strategies in practice is difficult and sometimes impossible. This is due both to fears of being subjected to sanctions by the state (heavy fines and long prison terms) for violating antitrust laws, and to the peculiarities of the state of the industry market. Therefore, the presence of competitive rivalry in oligopolistic markets is a rather frequent occurrence. However, even in this case, that is, in the absence of cooperative behavior, the nature of competitive interaction in an oligopoly has its own characteristics. Their essence is that each firm builds its competitive strategy, taking into account the one that competitors are implementing. In other words, the competitive behavior of the firm becomes a form of response to the decisions of other firms operating in the industry market. In this regard, it is extremely important to choose a parameter that is accepted by firms as an object of response, that is, the strategic variable that firms take as an initial prerequisite when making a decision and, in this sense, plays the role of an anchor in maintaining market equilibrium. Typically, this parameter is the price or volume of output. When the specified role is played by the price, there will be a price oligopoly, and when the volume of output is a quantitative oligopoly. Since reactive interaction is an extremely difficult process to analyze formally, we will simplify the problem somewhat by adopting a duopoly, that is, an industry market in which two firms operate, as a model for an oligopolistic market.

The Cournot model assumes that there are only two firms in the market, and each firm assumes that the competitor's price and output remain unchanged, and then makes its own decision. Each of the two sellers assumes that its competitor will always keep its output stable. The model assumes that sellers do not find out about their mistakes. In fact, these sellers' assumptions about the competitor's reaction will obviously change when they learn about their previous mistakes.

Suppose that there are two firms in the market: X and Y. How will firm X determine the price and volume of production? In addition to costs, they depend on demand, and demand, in turn, on how much output firm Y will produce. However, firm X does not know what firm Y will do, it can only assume possible options for its actions and plan its own output accordingly.

Since market demand is a given value, the expansion of production by the firm will cause a decrease in demand for the products of firm X. Figure 1.1 shows how the demand curve for the products of firm X will shift (it will shift to the left) if firm Y begins to expand sales. The price and output set by firm X on the basis of the equality of marginal revenue and marginal cost will decrease, respectively, from P0 to P1, P2 and from Q0 to Q1, Q2.

Fig 1.1 Cournot model. Change in price and volume of output

firm X with the expansion of production by firm Y: D - demand;

MR - marginal revenue; MC - marginal cost

If we consider the situation from the perspective of firm Y, then we can draw a similar graph that reflects the change in the price and quantity of its output depending on the actions taken by firm X.

By combining both graphs, we get the response curves of both firms to each other's behavior. On fig. 1.2, the X curve reflects the reaction of the firm of the same name to changes in the production of the firm Y, and the Y curve, respectively, vice versa. Equilibrium occurs at the point where the response curves of both firms intersect. At this point, firms' assumptions match their actual actions.

Rice. 1.2 - Reaction curves of firms X and Y to each other's behavior

One essential circumstance is not reflected in the Cournot model. Competitors are expected to react to a firm's price change in a certain way. When firm Y enters the market and robs firm Y of consumer demand, firm Y "gives up" and enters into a price game, lowering prices and output. However, firm X can take a proactive stance and, by significantly reducing the price, keep firm Y out of the market. Such firm actions are not covered by the Cournot model.

Many economists considered the Cournot model to be naive for the following reasons. The model assumes that duopolists do not draw any conclusions from the fallacy of their assumptions about the reaction of competitors. The model is closed, i.e. the number of firms is limited and does not change in the process of moving towards equilibrium. The model says nothing about the possible duration of this movement. Finally, the assumption of zero transaction costs seems unrealistic. Equilibrium in the Cournot model can be represented by response curves showing the profit-maximizing outputs that one firm will produce given the outputs of a competitor.

The response curve I represents the profit-maximizing output of the first firm as a function of the output of the second. Response curve II represents the profit-maximizing output of the second firm as a function of the output of the first.

Response curves can be used to show how equilibrium is established. If we follow the arrows drawn from one curve to the other, starting with output q1 = 12,000, then this will lead to the realization of the Cournot equilibrium at point E, at which each firm produces 8000 products. At point E, two response curves intersect. This is the Cournot equilibrium.

Bertrand's duopolists are like Cournot's duopolists in everything, only their behavior is different. Bertrand's duopolists start from the assumption that prices set by each other are independent of their own price decisions. In other words, not the opponent's issue, but the price set by him is a parameter, a constant for the duopolist. In order to better understand the difference between the Bertrand model and the Cournot model, we will also present it in terms of isoprofit and response curves.

Due to the change in the controlled variable (from output to price), both isoprofits and response curves are built in a two-dimensional space of prices, not outputs. Their economic meaning is also changing. Here, the isoprofit, or curve of equal profit, of the duopolist 1 ≈ is the set of points in the price space (P 1 , P 2) corresponding to combinations of prices P 1 and P 2 that provide this duopolist with the same amount of profit. Accordingly, the isoprofit of the duopolist 2 ≈ is the set of points in the same price space corresponding to combinations (ratios) of prices З 1 and P 2 that provide the same profit to the duopolist 2 .

Thus, for any change in the price of duopolist 2, there is a single price for duopolist 1 that maximizes its profit. This profit-maximizing price is determined by the lowest point of the highest isoprofit of duopolist 1. Such points shift to the right as one moves to higher isoprofits. This means that in increasing its profits, duopolist 1 does so by attracting buyers of duopolist 2, which raises its price, even if duopolist 1 also raises its price. By connecting the lowest lying points of all successively located iso-profits, we get the response curve of duopolist 1 to price changes by duopolist 2 ≈ R 1 (P 2). The abscissas of the points on this curve represent the profits that maximize the prices of duopolist 1 given the prices of duopolist 2 given by the ordinates of these points.

Now, knowing the response curves of the Bertrand duopolists, we can define the Bertrand equilibrium as a different (compared to the Cournot equilibrium) special case of the Nash equilibrium, when the strategy of each enterprise is not to choose its output volume, as in the case of the Cournot equilibrium, but to choose the price level at which he intends to sell his issue. Graphically, the Bertrand ≈ Nash equilibrium, like the Cournot ≈ Nash equilibrium, is determined by the intersection of the response curves of both duopolists, but not in the output space (as in the Cournot model), but in the price space .

A Bertrand equilibrium is reached if the duopolists' assumptions about each other's price behavior come true. If duopolist 1 believes that his rival will set the price P 1 2 , he will choose the price P 1 1 according to his response curve in order to maximize profit. But in such a case, duopolist 2 can actually set a price P 2 2 for his product based on his response curve. If we assume (as we did when considering the Cournot equilibrium) that the response curve of duopolist 1 is steeper than the corresponding curve of duopolist 2, then this iterative process will lead the duopolists to a Bertrand ≈ Nash equilibrium, where their response curves will intersect. The route of their convergence to point В≈N will be similar to the route of convergence of issues of Cournot duopolists. Since the output of both duopolists is homogeneous, each of them will prefer the same level of its price in equilibrium. Otherwise, the lower price duopolist will capture the entire market. Therefore, the Bertrand≈Nash equilibrium is characterized by a single price belonging in the two-dimensional price space to the ray emanating from the origin at an angle of 45.

In addition, in the Bertrand-Nash equilibrium, the equilibrium price will be equal to the marginal cost of each of the duopolists. Otherwise, the duopolists, each guided by the desire to capture the entire market, will reduce their prices, and this desire of theirs can be paralyzed only when they equalize their prices not only among themselves, but also with marginal costs. Naturally, in this case, the total industry profit will be zero. Thus, despite the extremely small number of sellers (there are only two in a duopoly), the Bertrand model predicts, in fact, a perfectly competitive equilibrium of an industry that has the structure of a duopoly.

Let, as in the Cournot model, the market demand is represented by a linear function Р = a - bQ, where Q = q 1 + q 2 . Then the inverse demand function will be Q = q 1 + q 2 = (a/b) √ (1/b)P.

If, for a given price of duopolist 1, P 1 > MC, duopolist 2 sets a price of 3 2 > MC, duopolist 1's residual demand will depend on the ratio of prices P 1 and P 2 . Namely, when P 1 > P 2 , q 1 = 0, all buyers attracted by a lower price will move to duopoly 2. Conversely, when P 1< P 2 весь рыночный спрос окажется захваченным дуополистом 1. Наконец, в случае равенства цен обоих дуополистов, P 1 = P 2 , рыночный спрос окажется поделенным между ними поровну и составит (а/b - 1/b P)0,5 для каждого.

The demand function of duopolist 1 is displayed with a gap (AB) in the demand curve DP 2 ABD". If duopolist 2 sets the price P 2, then the demand for the products of duopolist 1 will be zero, which corresponds to the vertical segment (DP 2) of its demand curve. At P 1 = P 2 the market will be divided equally (segment P 2 A will belong to duopolist 1, and segment AB to duopolist 2.) Finally, if duopolist 1 responds to P 2 by lowering its price below this level, it will capture the entire market (segment BD"). Each of the enterprises - duopolists can remain profitable, gradually reducing the price in order to increase its share of market demand until the equality P 1 = P 2 = MC is reached, which characterizes the Bertrand≈ Nash equilibrium state.

Thus, unlike the Cournot model, which predicts the achievement of a perfectly competitive result only as the number of oligopolists increases, namely, when n / (n + 1) approaches unity, the Bertrand model predicts a perfectly competitive result immediately upon transition from a monopoly of one seller to duopoly. The reason for this dramatic difference in conclusions is that each Cournot duopolist faces a downward residual demand curve, while a Bertrand duopolist faces a perfectly elastic demand curve with respect to the competitor's price, so that a price cut is profitable as long as it remains above marginal cost.

After studying the models of Cournot and Bertrand, which predict significantly different outcomes for n = 2, you will have a natural question, whose model is “better”, “more correct”, in a word, which one should be used in the analysis of oligopoly. Before we try to answer it, let's think about this. Not only are the duopolists of Cournot and Bertrand "naive" and unable to correct their behavior under the influence of experience or, as is often said, not capable of "learning by doing", they are endowed with another, convenient for building a model, but very unrealistic, property ≈ their production facilities are literally "dimensionless" and able to contract and expand like rubber. After all, duopolists can, without incurring any additional costs, freely vary the volume of their output from zero to a value equal to the entire market demand. At the same time, their marginal and average costs remain unchanged, there is no economy or uneconomics of scale. F. Edgeworth proposed to introduce a power limitation into the Bertrand model.

A clear illustration of the mechanism of price competition in an oligopoly can be the broken demand curve model, also known as the Sweezy model, named after the American economist P.M. Sweezy (1910-2004). The model of a broken demand curve is based on the assumption about the characteristics of the response in the conditions of oligopolistic interaction. The essence of the assumption is that competitors will always respond to a price reduction by a firm by responding with an adequate price reduction for their product, but will not respond to a price increase by the firm, leaving their prices unchanged. Moreover, a certain degree of differentiation of the product of firms is allowed, which, however, does not prevent the high elasticity of substitution of products of different firms.

Rice. 2.1 Curved demand curve model: D1,MR1 - demand curves and

the firm's marginal revenue at prices above P0;

D2 MR2- curves of demand and marginal income of the firm at

prices below P0

Since the considered principle applies to all firms operating in the sectoral market, the sectoral demand curve will have the same form. The peculiarity of the demand curve is that it has an inflection point E, which is the equilibrium market price point, which, in turn, determines the optimal output of individual firms. However, as we already know, in the case of a broken demand curve, the marginal revenue line also becomes a broken line MR d . The main feature is that the marginal revenue line has a ST gap, which is how it differs sharply from the marginal revenue curves for perfect and monopolistic competition, as well as monopoly. This gap will be greater the smaller the number of firms operating in the market, the more similar in terms of production capacity they are, the more standardized their product and the closer the interaction between them. If firms are guided in their behavior by profit maximization (MR = MC), then even if the marginal costs of production change in the ST range, for example, if they increase from MC X to MC 2, the firm will not change the output q*. Being wary of a price increase due to the threat of market share reduction, as well as its decrease due to the reaction of competitors, the firm will prefer to keep the price at the level of the prevailing equilibrium market price P*. Simply put, expecting a very specific type of response to their actions, each of the firms will not seek to use price as a means to gain competitive advantage, preferring to maintain it unchanged even if production costs rise.

Oligopolistic interaction encourages firms to maintain market price stability.

In conclusion, we can fix a number of features of the functioning of the oligopolistic market. First, its participants will refrain from unmotivated price changes. Secondly - to sell at the same or comparable prices. Thirdly, in an oligopoly, there are factors that determine the stability (rigidity) of market prices.

2.3 Comparative characteristics of models

Of course, price stability is an important condition for extracting economic profit and, of course, is in the interests of oligopolists. However, practice does not confirm such unambiguity. This is apparently due to the fact that competing firms do not always regard the price reduction as an attack on their market shares. Therefore, their response is not as unambiguous as it is assumed in the model. In addition, when facing similar problems (decreasing demand, rising costs), firms can follow the initiative of the first mover. The weakness of the model lies in the fact that, while explaining price stability, it does not reveal the mechanism for the formation of the initial equilibrium, that is, it does not say anything about how the market moves to the inflection point.

The choice of a model of interaction between firms in the industry market depends on many factors. First of all, from those that have a decisive influence on competitive conditions. Nevertheless, a certain typology of the choice of a behavior model by firms can be given.

Experimental modeling showed that, firstly, the choice of the behavior model of firms depends on their number. In a duopoly, collusion is almost inevitable. Interaction in a model with a limited number of participants most often ends up with results close to the Cournot equilibrium. Secondly, the criterion used by the owner to encourage the heads of firms plays a significant role in choosing a behavior model. When contractual relations provide for the application of penalties by the owner for increasing sales volume, a model of interaction between firms will be formed that is as different as possible from the Bertrand model, and sales volumes will be selected taking into account the maintenance of fixed prices and profits. If, however, the sales volume is taken as a criterion for evaluating the work and rewarding top management, then firms will tend to the Bertrand model of interaction. Moreover, even those firms where the incentive system is based on other criteria will be involved in such a model of interaction.

Quantitative models of oligopoly (Cournot, cartel) will dominate in those industry markets where there are production constraints. In capital-intensive industries that require large capital investments and time to change production capacities, it is difficult to vary the volume of output. Therefore, in manufacturing industries, firms will prefer to compete on price rather than volume. A price oligopoly (Bertrand model, price leadership) is more likely to be present where there are barriers to price adjustment. In the case of consumer goods, changing the price is not as simple a matter as it might seem. The conclusion of long-term supply contracts, fixing prices in the eyes of consumers (catalogues, price lists) impose serious restrictions on pricing, and the response of firms is more likely to be expressed in volume adjustments. We can say that for industries with a long production cycle, price adjustment will be characteristic, while for industries with a short production cycle, output adjustment. If we evaluate the models of oligopolistic interaction by their effectiveness, then with a certain degree of conditionality it can be argued that the cartel will be the least effective among them, and the interaction in the Bertrand model will be the most effective.

Conclusion

In our course work, we tried to consider the theoretical features of the functioning of such a market structure as an oligopoly.

An oligopoly is a situation where there are a small number of firms in the market that control the majority of the market.

In particular, oligopoly, we considered its main features in the first chapter of our work. The main features of an oligopoly include: a small number of firms, barriers to entry into the market, price control, non-price competition, interdependence of producers.

In the economic literature, there are many criteria by which oligopolies are classified. For example, according to the nature of the products produced, homogeneous and differentiated oligopolies are distinguished.

Oligopolies are characterized by interdependence. The relationship of the subjects of the oligopoly is especially clearly manifested in the pricing policy. If one of the firms lowers the price, others will immediately respond to such an action, because otherwise they will lose buyers in the market. Interdependence in actions is a universal property of an oligopoly.

Oligopolistic firms mainly use methods of non-price competition. There is evidence that in many oligopolistic industries prices have remained stable over long periods of time.

Firms operating within the oligopolistic structure of the market strive to create a network of connections that would allow coordinating behavior in the common interest. One form of such coordination is the so-called price leadership. It consists in the fact that changes in reference prices are explained by a certain firm, which is recognized as the leader by all the others following it in pricing policy. There are three types of price leadership: dominant firm leadership, leadership conspiracy, and barometric leadership.

Dominant firm leadership is a situation in the market where one firm controls at least 50% of production, and the remaining firms are too small to influence prices through individual pricing decisions.

The leadership conspiracy involves the collective leadership of several of the largest firms in the industry, taking into account the interests of each other. Price leaders must then decide whether to announce price changes that are favorable only to them, or to set a price level that will mitigate the contradictions between all firms operating in the industry.

Barometric price leadership, unlike the previous type of price leadership, is a more amorphous and indefinite structure; it often fails to achieve high price levels. Often there is a change of leadership. He is not always followed due to his lack of ability to force the rest of the participants to take joint action. They advertise reference prices, but the actual prices set by other firms differ from those advertised.

The theory of oligopolistic pricing shows why firms avoid price competition in the struggle for markets. By raising the price, the manufacturer loses part of the market in favor of the rival; by lowering the price, he provokes counteractions and again gains nothing. Therefore, the oligopolist uses methods that rivals cannot reproduce quickly and completely. A firm's market share is largely determined by non-price competition. This involves improving the quality of goods, their differentiation, the use of advertising, the improvement of after-sales service, the provision of loans. The competition model is becoming more complex, and its methods are becoming more diverse.

In summary, despite some of the disadvantages of an oligopoly, such as using market power to limit competition and raising prices, an oligopoly has many advantages and is one of the most common market structures in the modern economy.

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Oligopoly is a form of imperfect competition and in many ways resembles a pure monopoly. The term "oligopoly" (gr. oligos - a little, little) was introduced into scientific economic circulation by the English economist E.

Chamberlin to denote the small number of market participants. An oligopoly is a market in which a few firms sell standardized or differentiated products, access to which is difficult for other firms, price control is limited by the interdependence of firms, and there is strong price competition. Oligopsony is a market with only a few buyers. In economic theory, oligopoly is considered as the most common market structure, which is characterized by a small number of producers of the same product. Oligopoly is a market model that covers a large segment of the market - from pure monopoly to monopolistic competition.

Oligopoly is characterized by a number of features:

- there is an interdependence of firms in the industry, the strategy of market behavior of each of them is formed taking into account the actions of a few counterparties;

- the industry is dominated by a few very large firms (usually two to five);

- the dominant firms are so large that the volume of production of each of them can affect the volume of industry supply. Therefore, oligopolistic firms can influence the market price, i.e. exercise monopoly power in the market;

- the product of an oligopoly can be both homogeneous (homogeneous) and differentiated;

– entry into the industry is limited by various barriers;

The demand line for an oligopoly's product is similar to the demand line for a monopoly's product.

Oligopoly can take several forms:

Duopoly - a situation where two large firms dominate the market. They divide the sectoral volume of demand in a proportion corresponding to the production possibilities of each of them. A duopoly is the minimum size of an oligopoly (hard oligopoly);

- A pure oligopoly is a market structure in which eight to ten firms operate in an industry with approximately equal sales in the market. The concepts of "big five", "big ten", etc., arise;

- vague oligopoly - a position in the market in which five or six large firms share about 80% of the industry's sales volume among themselves, and the rest falls on the competitive environment (outskirts). The competitive margin may be numerous, the firms included in it may be pure competitors or monopolistic competitors.

There are two main types of oligopoly:

- a homogeneous oligopoly consists of firms producing a homogeneous, standardized product (oil, steel, cement, copper, aluminum);

- a heterogeneous oligopoly consists of firms producing differentiated products (cars, cigarettes, household appliances, etc.).

There are objective conditions for the formation of an oligopoly:

1. Scale effect. For an industry to operate efficiently, it is necessary that the production capacity of each firm occupy a large share of the total market. The scale effect is realized by reducing the number of producers and increasing the market share of each. Firms remaining in the industry have more advanced technologies and achieve economies of scale.

For example, in the US automotive market, out of 80 firms due to mergers, acquisitions and bankruptcies by the end of the 20th century. three firms remain (General Motors, Ford, Chrysler), which account for 90% of industry sales, are technologically more advanced and realize economies of scale.

2. The merger of several firms into one, larger one, allows you to realize economies of scale and gives you more power in the market, increases sales, allows you to control not only the market for the finished product, but also raw materials, i.e. there is an opportunity to reduce production costs and get more profit. And this, in turn, helps create barriers to other firms and encourages more mergers. The highest degree of mergers - fusing - involves the complete interpenetration of merging firms (railroads, water power plants, automobile production).

Barriers to entry into the oligopolistic industry are: economies of scale; licenses, patents; ownership of raw materials; the amount of advertising expenses, etc.

Oligopoly occupies an intermediate position between monopoly and monopolistic competition, it differs significantly from them, is a more complex economic situation, due to the peculiarities of price changes. In perfect competition, the seller does not take into account the influence of other sellers and changes in consumer demand. Therefore, in a competitive market, prices change continuously depending on changes (fluctuations) in supply and demand. In a monopolistic industry, the monopolist takes into account only changes in consumer demand, and determines the price and volume himself.

In the conditions of an oligopoly, the situation changes: each oligopolist, when determining the strategy of his economic behavior, must take into account the behavior of both consumers of his products and competitors who operate with him in the same market. Therefore, the central problem of oligopoly is that the firm must take into account the response to its actions from competing firms. This reaction is usually ambiguous and unpredictable. In an oligopolistic market, a new complicating factor emerges: interdependence. No oligopolist will change his firm's pricing policy until he has calculated the likely moves of other firms and the expected reaction of competitors. The scarcity that gives rise to universal interdependence is the unique property of an oligopoly. Therefore, the oligopolist must build his strategy of behavior in the market, taking into account not only his own goals, market data, but also the results of predicting the response behavior of competitors. With this in mind, firms in the oligopolistic market must make decisions about the volume of production, price, advertising, updating the assortment, etc. All this complicates the decision-making process.

The theoretical analysis of the firm's behavior in an oligopoly is also difficult. There is no general, universal theory of oligopoly, because:

- oligopoly is a variety of special market situations in a wide range (from rigid to vague oligopoly, with or without collusion). Different types of oligopolies do not fit into one model;

- the presence of interdependence leaves an imprint on the market situation: the oligopolist does not always correctly assess the actions of competitors, demand and marginal revenue, so it is difficult to determine the optimal price of products and production volume, the conditions for maximizing profits.

In economic theory, several models of oligopoly have been developed that describe specific economic situations. All models have common features. Let's consider the main ones.

Oligopoly models without collusion.

1. Cournot model. This is one of the first models of oligopoly in the form of a duopoly. Such a model is often implemented in regional markets and reflects all the characteristic features of an oligopoly with three, four, or more participants (Fig. 7.16).

Rice. 7.16. Cournot model

In 1838, the French mathematician and economist O. Cournot proposed a duopoly model, which was based on three premises:

- there are only two firms in the industry;

- each firm perceives the volume of production as a given;

Both firms maximize profits.

Let us assume that the cost of producing a unit of a product does not depend on the volume of production and is the same for both manufacturers.

Therefore, MR1 = MC2; dd1 and dd2 are the demand lines for the products of the first and second producers, respectively.

O. Cournot divides the existence of a duopoly into several periods:

- in the initial period, only the first firm produces products, which means that a monopoly situation arises. The monopolist has a demand line dd1 and a marginal revenue line MR1. Aiming for the maximum profit (MR1 = MC1), the firm will choose the volume Q1 and the price P1;

- in the second period, the second firm (monopolist) will be connected to the first one and a duopoly will arise. The first firm will lose its monopoly position. The second firm, when entering the industry, will consider the price and output of the first firm as given, it will give a smaller output: its demand is characterized by the line dd2 and marginal revenue MR2. The volume of Q2 will be determined by the intersection of the lines MC2 and MR2, by the price of P2 (at the intersection with dd2). The price of the second firm is lower to entice consumers. In this situation, the first firm, in order not to give up its market niche, will be forced to sell its products at a price P1 = P2;

- in the third period, the active role will again pass to the first firm.

It will take Q2 as a given value and form a new demand function dd3. At the intersection of Q2 and MR1, we find point E, through which dd3 will pass parallel to the previous demand lines. Similarly, the process of production will develop in subsequent periods, it will alternately include one or the other duopolist.

O. Cournot proved that the market situation develops from monopoly to oligopoly. If the number of participants in the oligopoly grows and each of them strives to achieve a temporary gain, then there is a tendency to move from oligopoly to free competition. Under free competition, each firm will maximize profits at the volume when MR = MC = P. The development of an oligopoly in the direction of free competition is possible, but not necessary.

Such a transformation will result in an overall decrease in profits, although in the very process of moving from one market model to another, each of the producers may receive a temporary gain. The main emphasis in the Cournot model is placed on the strong interdependence of firms, the interdependence of their behavior. Each firm takes the situation for granted, to strengthen the market reduces the price and conquers a new market segment. Gradually, firms come to a section of the market that corresponds to the balance of their forces.

General conclusions from the Cournot model:

- in a duopoly, the volume of production is greater than in a monopoly, but less than in perfect competition;

The market price under a duopoly is lower than under a monopoly, but higher than under free competition.

2. Chamberlin model. E. Chamberlin in his work "The Theory of Monopolistic Competition" (1933) proved three theorems that reveal the types of behavior of oligopolists.

Theorem 1. If sellers do not take into account mutual dependence and believe that the competitor’s supplies will remain unchanged in any case, then as the number of sellers increases, the equilibrium price will decrease below the equilibrium monopoly price and reach a purely competitive level, when the number of sellers will tend to infinity (Fig. 7.17).

Rice. 7.17. Chamberlin model

Take the demand line DD1, the market capacity will be equal to OD1. If the oligopoly is considered as a duopoly, then each seller is able to put on the market the second part of the market capacity OD1 (point E). If the first seller enters the market, then he sells all his products in the amount of OA, the monopoly price PE is set on the market. If the industry costs are fixed, then this price will be monopoly. The profit of the first firm will be equal to the area of ​​the OAEP rectangle (shaded area).

The second firm in the industry has a market capacity of AD1. From point E draw the line MR2 parallel to the line MR1. The price of the second firm will be equal to PC, profit - the area of ​​the rectangle ABCF. As a result, the second competitor will increase sales in the market to the value of OB; the price will fall to PC, and at the same time, the profit of the first firm will decrease to a value equal to the area of ​​\u200b\u200bthe OPCFA rectangle, therefore, the profit of the first firm will fall by half - from OPEEA to OPCFA. The position of the first firm has become suboptimal, the volume of sales is too large for the market that remains at its disposal. In order to get to the optimal point, he lowers the volume of sales to half the capacity of his market. At the same time, the second firm will expand its sales volume by half of the vacated market capacity, and the process will continue indefinitely.

Market share to be occupied by:

- the first seller: 1 - 1/2 - 1/8 - 1/32 = 1/3 OD1;

- second seller: 1/4 + 1/16 + 1/64 = 1/3 OD1.

Together they will provide two-thirds of OD1, therefore, the market will be saturated by two-thirds of its volume.

The share of each seller is 1 / (n + 1); n is the number of sellers.

Total revenue TR = n /(n + n); n > ¥.

When n > ¥, the saturation of the market tends to the value of its capacity OD1, and the price tends to zero.

Theorem 2. If each seller assumes that the price of his competitor remains unchanged, then the equilibrium price (if there is more than one seller) is equal to the purely competitive price:

- if each competitor assumes that the price of his rival will be unchanged, then he will reduce the price to a level lower than the price of the competitor, and will attract his buyers to his side;

- the first competitor will most likely do the same: he will lower the price compared to the competitor's price and attract buyers to him. Competitive price gouging will continue until they put all their products on the market and the price becomes competitive.

From the first two theorems, E. Chamberlin draws important conclusions:

- if one of the sellers keeps the size of his offer unchanged, then the second seller is able to undermine his price by his maneuvers;

- if the first seller keeps his price unchanged, then his sales volume becomes vulnerable.

Theorem 3. If sellers take into account their total influence on the price, then the price will be monopoly, it will be set at the level of PE and OA of products will be sold (see Fig. 7.17). Sellers adjust to each other in terms of sales volume. Proof: if the first competitor starts with sales volume OA, then the second one will produce volume AB; then the first competitor will halve the volume of sales and the total volume of OA will bring the monopoly price P. This price will be stable, because, retreating from it, any competitor causes damage not only to the rival, but also to himself. If the number of sellers increases, but they all take into account their indirect influence on other sellers, then the price will not decrease, and the volume of output will not increase. However, if there are a lot of producers and they do not take into account the interdependence from each other, then the price will begin to decline, and the sales volume will approach the maximum value of OD1.

If the number of sellers increases, then the price will become competitive, there will be a break point. In an oligopoly, prices change infrequently, usually at regular intervals and by a significant amount. Such "fixed" prices occur when firms face cyclical or seasonal fluctuations in demand, which are taken into account in pricing. Oligopolists usually do not change the price of goods, but react to changes in demand by lowering or increasing output. This is the most beneficial, because. price changes are associated with significant costs (changes in price lists, costs of notifying customers, loss of customer confidence).

Notes on theorems:

1. Many antimonopoly laws provide for sanctions in case of collusion of oligopolists, as well as if they, without collusion, pursue a policy that the court recognizes as monopolistic.

2. Theorems 1–3 are proved on the assumption that the mutual adaptation of competitors occurs instantly. But if there is a time gap between the action and the reaction (the act of adaptation), then the seller, who was the first to break the balance, receives advantages over other sellers as a result of a price reduction. The competitor's assessment of this advantage is usually proportional to the period during which he intends to be in the market.

If in an oligopolistic industry there is a general interdependence between firms, but there is no collusion, then the location and shape of the demand curve for these products will have a specific form.

3. Model of a broken demand curve for oligopoly products.

At the beginning of the twentieth century. The attention of theoretical economists was attracted by the fact that prices in some oligopolistic markets remain stable for a long time. For example, in the United States, the price of railroad tracks has not changed for decades, although both demand and costs have changed.

To explain this situation, a model of a broken line of demand for the products of an oligopolist was proposed. Competitive firms can equalize their prices following the changes of the first firm, or they can ignore its actions, do not pay attention to them.

Suppose that one of the oligopolists at some point has a certain demand and price corresponding to point E (Fig. 7.18). Point E is given, but this model does not explain how this combination of volume and price has developed. The demand line DD1 is relatively inelastic; An oligopolist is risk averse, he will only take risks when a change in price gives him a big win.

Rice. 7.18. Broken demand curve for oligopoly products

An analysis of the oligopoly's activity shows that price cuts will be evened out, because competitive firms will try to prevent the price-cutting oligopolist from taking customers away from them. At the same time, a similar price increase will not follow after the oligopolist, because the competitors of the firm that raises the price will try to win back the confidence of the buyers lost as a result of the price increase.

The oligopolist's reasoning goes like this:

– if I lower the price, then my competitors, expecting a reduction in their sales, will do the same, so few will benefit from the price reduction, because. demand line DD1 has a steep slope;

- if I raise the price, but competitors do not do this, then the company will lose customers, the elasticity of demand will increase and the demand curve will become flatter - the NOT line. The line DE will take position NOT and as a result the demand line will become HED1.

Thus, the demand line in the subjective perception of a risk-averse oligopolist has a break at point E. The segment NOT of the demand curve will characterize the situation when competitors “ignore” price increases; and the segment ED1 will characterize the situation when competitors "follow the example" and reduce prices. A kink in the HED1 demand line means there is a gap, so the oligopolist faces a "broken demand curve". Above the current price, the curve is highly elastic (NOT); in the area below the current price (ED1), the curve is less elastic or inelastic. A break in the demand line means a gap in the marginal revenue line MR, which is also represented by a broken line and consists of two segments - HL and SK. Because of the sharp differences in the elasticity of demand above and below the current price point, there is a gap that can be seen as a vertical segment LS in the marginal revenue curve, hence MR = HLSK.

It is important that MR = MS. Let the marginal cost line initially occupy position MC1 (at QE and PE). If commodity prices rise, then the costs of the oligopolist will increase and the MC1 curve will go up and move to MC2 (for this position, the combination of output and price will be the same). The oligopolist decides to change the price when the intersection point of MR and MC3 is outside the vertical section (to the left of point E) of the MR line. This corresponds to the curve MC3 in the figure for the volume Q3. With a slight change in costs or demand, the oligopolist will not change the price.

The considered model serves to explain the relative price stability in oligopolistic markets in the presence of inflation:

- a broken demand curve shows that any change in price will lead to the worst: if profits increase, buyers will leave, if profits fall, then costs may exceed the growth in gross income. In addition, a “price war” may arise: competing firms will further reduce the price and there will be a loss of buyers;

- a broken curve of marginal revenue MR means that, within certain limits, significant changes in costs (from S to L) will not have any effect on the values ​​of Q and P.

This explains why an oligopoly that does not have collusion prudently does not change prices in leaps and bounds, making them inflexible.

Keeping prices at the same level is effective only in the short term, it is unacceptable for the long term.

Oligopoly in the short run. The ability to hold prices in the short term is inherent in the very behavior of oligopolistic firms: by planning production, they prepare it in advance for an increase or decrease in demand. Usually, the oligopolist has a special (saucer-shaped) AVC curve (Fig. 7.19): on the interval (Q1 - Q2) AVC \u003d MS \u003d const.

Rice. 7.19. Oligopoly in short

Usually, based on market research, firms determine their “normal” demand curve (DDH), which reflects how much of a product they can sell on average in the market at each price. Knowing the potential demand, the firm installs the equipment, determines the "normal" price from the "normal" demand curve. Since the maximum profit is at the point corresponding to MR = MC, and MC coincides with AVC, the intersection of MR = AVC (point A) is most beneficial for the oligopolist. In the case of demand fluctuations around DDH within the Q1 - Q2 section, we obtain demand lines D1 and D2; while the price remains "normal" and unchanged, and the volume of production varies from Q1 to Q2. It should be noted that holding prices is advisable if, with certain output volumes, it is possible to keep AVC constant; if the firm has a classical AVC parabola (without a flat area), then attempts to hold the price and the fall in output with a decrease in demand will lead to losses.

Oligopoly in the long run has not yet received a theoretical description, because. it is necessary to know the response of competitors to a possible price change. Since their actions are not determinable, scientists have not yet succeeded in creating a unified theory of the behavior of an oligopolistic firm in the long run.

4. Model of game theory.

Game theory was proposed by J. Neumann and O. Morgenstern (1944). Its application to the analysis of oligopoly is very fruitful. Game theory considers the behavior of firms in the market as a game in which all participants make decisions in accordance with certain rules. When making decisions, the participants in the game do not know exactly what strategy the opponent will choose. The result for the participant depends on the reliability of forecasts in the game - prizes (profit) or fines (losses). An analogue of the game situation in the oligopolistic market is the so-called "prisoner's dilemma".

Matrix of prizes and fines for two prisoners in one case:

Let's assume that the prisoners cannot come to an agreement and choose the best position - not to confess and receive one year of probation on the basis of circumstantial evidence. How should the first (A) behave if he does not know the reaction of the second (B)?

There are behavioral strategies: max-min and max-max.

The max-min strategy characterizes a pessimistic outlook on life, when A believes that B will do the worst (shift all the blame on A). The worst option for A is that A does not confess, but B "squeals".

To avoid this and secure a less bad result for himself, A confesses ("knocks"). If B does not confess at the same time, then A has freedom, and B goes to prison for a full term. If B argues in the same way, then it will be more profitable for him to confess. If both accept guilt, then the term from ten (potential years) is reduced to five years for each. Without agreeing, smart prisoners admit their guilt (less bad result than a term of ten years).

The max-max strategy attracts optimists. Prisoner A thinks it's better to be free or to go to jail for less time. He confesses, expecting the other to not confess. If B does the same, then both repent of their deeds (a period of five years). The players made the same decisions and ended up in the lower right corner of the matrix. This outcome is called the Nash decision or the Nash equilibrium. The conditions for this equilibrium are as follows: if the strategy of the first player is given, then the second player has only to repeat the move of the first, and vice versa. A similar decision-making choice arises in the market when oligopolistic firms decide whether to cut prices or not, to advertise or not, and so on.

The strategy of two firms:

If firms A and B advertise the product, then the profit will be 50 units, if one of them advertises and the other does not, then the advertising firm gains a competitive advantage and increases profits to 75 units, while the other will suffer losses (-25 units). . If both firms have advertising, then the profit will be 10 units. (because advertising itself is expensive and the overall effect is lower by the amount of costs).

The pessimistic approach is to look for the best option from the bad ones. The firm compares the numbers 10 and -25 and chooses advertising with all its costs (not to win, but not to lose!). The optimistic approach is the search for the best option of all possible. It is better to get 75 units. profits, they are compared with 50 units. and select ads. The advertising war is a zero-sum war.

5. Model of competitive markets.

The initial premise of this model is the assumption that entering and exiting an industry costs nothing. In fact, the creation of a company and its liquidation are associated with significant difficulties (costs). If in theory the absence of barriers is recognized, then the threat of intrusion by competitors becomes real. Large oligopolists may lose their market power. The threat of competition acts on the oligopoly in such a way that there is a desire to reduce the overall level of costs, the price level, to increase production volume. This leads to a decrease in economic profit and the preservation of only normal (accounting) profit.

6. Model of collusion.

Under conditions of perfect or monopolistic competition, there are many firms that cannot reach an agreement and compete with each other (in the form of price and non-price competition). There are few firms in an oligopolistic industry, and they can always agree on a joint strategy and tactics, on prices, on the division of the market. Firms collude to determine the optimal share of each participant in industry production. At the same time, the market develops according to the type of monopoly and the total volume of industry profit increases due to rising prices and a decrease in production volume (compared to the market of perfect competition).

Consider how price P and volume Q are determined by collusion (Figure 7.20).

Assume that all firms in an industry produce homogeneous products, have the same cost curves, and equalize their prices. Assume that the demand curves of all firms are the same. Under collusive conditions, it becomes profitable for each firm to equalize the price and get the maximum profit (the area shaded by KREM) with the volume QE. For society, the result of collusion will be the same as if the industry were monopolized.

Rice. 7.20. collusive oligopoly model

An agreement can take many forms, the simplest of which is a cartel (a written agreement on prices and output). Researchers of market structures evaluate cartel agreements ambiguously, referring them to an oligopoly or a monopoly. From the standpoint of antimonopoly law, the attitude towards the cartel is also ambiguous. In a number of countries, collusion over prices and quotas is prohibited. But at the international level, such well-known cartels as OPEC (Organization of Petroleum Exporting Countries) successfully operate. His activities had a significant impact on the oil market in 1970–1990. (by reducing the volume and increasing the price). There is also another oil cartel, called the "Seven Sisters" - a collection of five American oil companies, one British and one Anglo-Dutch company. The German cartel AEG operates in the electrical equipment industry.

For a cartel agreement to be stable, a number of conditions must be met:

- the demand for the cartel's products should be price inelastic, and the product itself should not have close substitutes;

- all cartel members must follow certain rules of the game.

A firm that violates the conditions gains competitive advantages, but loses relationships with partners.

At present, the importance of price competition has decreased; antitrust laws became more stringent, so the importance of the cartel in its classical form decreased. Modern cartels do not touch upon the issues of prices and volumes in the agreement, but deal with the conditions for the joint implementation of large-scale investment projects, the joint use of equipment. Legal cartels gravitate more and more towards conspiracy.

7. Model of conspiracy.

A collusive oligopoly occurs when firms reach an explicit or tacit (implicit) agreement to fix prices, divide or allocate markets. Collusion eliminates uncertainty, prevents price wars, and erects barriers to entry of new competitors into the industry.

According to P. Samuelson and J. Galbraith, modern firms do not need to enter into open contracts. A well-established information service allows you to keep abreast of the affairs of companies in the industry, know their capabilities, goals, interests, and, based on this information, develop a strategy that is beneficial to everyone.

There are several forms of collusion.

Price leadership model. This situation is typical for a vague oligopoly, when one of the largest firms stands out among a large number of firms, which plays the role of a clear leader. The leader determines the pricing policy, which is supported by all other firms in the industry. The leader sets the price in such a way that it serves the interests of all firms, even those whose costs are high. In such a situation, the leader receives superprofits. If the leader lowers the price, then small firms cannot compete and leave the market. After that, the leader raises the price and expands its market niche.

The leadership position can move from one firm to another. A kind of leadership in general is the barometer firm model. This position is claimed by a firm that does not dominate in terms of production, but has a certain prestige in the industry. Her behavior, incl. price, is a benchmark for other oligopolistic firms.

Rule of thumb model. When there is no clear price leader, firms in pricing can follow simple generally accepted rules, which are called the rules of thumb.

The first rule is pricing based on average AS costs.

In practice, a certain value is added to the AC (for example, 10%), which will be the profit of the oligopolist. The price of the product will be determined according to the “cost plus” rule, i.e. average cost plus profit margin. With a change in the AC value, the price automatically changes.

The second rule is the establishment of some customary price levels (for example, 19.99; 39.95...). Price steps are widely used, but traditional prices are used as steps. This practice is used in sales.

Models of collusion exist in the form of so-called "gentlemen's agreements", when the parameters of the agreement (collision) are not fixed anywhere, they are formed at the level of an oral agreement.

Only in this form can it act as a secret treaty. At the same time, collusion in an oligopolistic market is unstable, because there are objective conditions conducive to its violation.

Barriers to conspiracy:

1. Differences in demand and costs. It is very difficult to reach an agreement on price when the oligopolists have large differences in demand and costs. In this case, firms will maximize profits at different prices, and a single price will be unacceptable for all firms; therefore, it is very difficult to come to an agreement, it will infringe on someone's interests.

2. Number of firms. The more firms in an oligopolistic industry, the more difficult it is for them to reach an agreement; this is especially difficult for a “vague” oligopoly, where the competitive fringe will not agree to a secret price agreement due to the large number of firms and the insignificant sales volumes of each manufacturer.

3. Fraud. Each firm in an oligopolistic industry seeks to gain temporary advantages, for which attempts are made to covertly (if there is collusion) lower prices and attract buyers from other firms. The result of this fraud is the sale of additional units of products on the basis of price discrimination. For this additional output, MR = P, and the firm will be profitable up to the point where P = MC. However, covert price discounts can become overt; fraud will come out and lead to a price war between the oligopolists. Therefore, the use of secret price discounts is an obstacle to collusion.

4. The downturn in business activity in the industry encourages firms to respond to reduced demand by lowering prices and attracting additional buyers at the expense of competitors to increase their own profits and increase the efficiency of their production capacities. Firms' attempts to stay afloat in a downturn in this way usually destroy collusion.

5. The possibility of other firms entering the industry will become more attractive, because prices and profits rise under conditions of collusion. However, attracting other firms to the industry will cause an increase in the market supply, will have a downward effect on prices and profits. If blocking entry into an oligopolistic industry is unreliable, then collusion will not last long and prices will fall.

6. Legal Obstacles: The antitrust laws of a number of countries prohibit conspiracies and prosecute them. However, secret agreements are made orally in an informal setting. They fix the price of the product, the quotas of sellers, which is expressed in non-price competition. Such agreements are difficult to detect and apply the law to them.

The special position of the oligopoly in the competitive market structure between pure monopoly and pure competition determines the specifics of oligopolistic competition. As all the considered models of oligopoly show, with a given market structure there are no allocative and production efficiency (P > MC and P > AC). The degree of restriction of competition and monopolization of the market is high. Oligopolistic barriers make it difficult for capital to flow. The role of the oligopoly in scientific and technological progress is also ambiguous: on the one hand, a high level of industrial competition acts as an engine of technical progress, provides more funding for R&D, and the use of high technologies. On the other hand, there is an inefficient use of resources. In general, oligopolies characterize a very important structural unit of a market economy.

7.5. MONOPOLISTIC COMPETITION

Monopolistic competition is a common type of market, it is an intermediate market model between oligopoly and perfect competition. Monopolistic competition is a market in which many firms sell a differentiated product, access to which is relatively free, and each firm has some control over the selling price of its product in the face of significant non-price competition.

The main features of the market of monopolistic competition are the following:

- there are a large number of small firms in the market;

- an individual firm offers on the market an insignificant (compared to the industry) volume of products;

firms produce a variety of (differentiated) products;

- the demand for the products of a monopolistic competitor is not perfectly elastic, but its elasticity is quite high;

- although the product of each company is somewhat specific, the consumer can easily find substitute products and switch his demand to them;

– little ability to influence or control the price;

- there are practically no barriers to the inflow of new capital, so the entry of new firms into the industry is not difficult, does not require significant initial capital investments;

- the level of market competition is quite high;

A characteristic feature of the firm in conditions of monopolistic competition is the specificity of the product. There are many substitute products (substitutes) for the firm's product, but the differentiation of the product (real or imaginary) under conditions of monopolistic competition makes it actually unique. An example of markets for monopolistic competition are the markets for clothing, footwear, cosmetics, alcoholic and non-alcoholic beverages, coffee, medicines, etc. Through extensive (often aggressive) advertising, the manufacturer communicates to consumers about the benefits of his product. Patenting trademarks, industrial brands, etc. allows you to consolidate the advantages and uniqueness of the product, which gives the company the opportunity to influence prices and gives it some features of a monopoly.

In the short run, the behavior of a monopolistically competitive firm is similar to that of a monopoly, but there are some differences from other market structures. Compared to a purely competitive firm, a monopolistic competitor has a higher price and a smaller volume, compared to a monopoly - on the contrary. The demand curve for a monopolistic competitor's product is less elastic than the demand curve for a perfect competitor, but more elastic than the monopolist's or the industry's demand curve. The demand curve for a monopolistic competitor's product is less elastic than the demand curve for a perfect competitor, but more elastic than the monopolist's or the industry's demand curve. Price control allows a monopolistic competitor to increase the price of a product without losing demand for it in the face of regular customers. To attract additional customers and increase sales, the firm needs to lower the price. In this regard, the marginal revenue of the firm of a monopolistic competitor is not equal to the price, and the marginal revenue line is located below the demand line.

The firm chooses a combination of demand and price that allows it to maximize profits, provided that MR = MC (Fig. 7.21).

Rice. 7.21. The equilibrium of a monopolistically competitive firm

If the demand for products is insufficient, then losses are possible (Fig. 7.22).

Rice. 7.22. The firm is a monopolistic competitor

in a loss situation

The area of ​​the PMMAPA rectangle quantifies the amount of loss. If the price is higher than the average variable costs, then the firm will be able to minimize losses by producing products at a volume at which MR = MC. If the price does not cover the average variable cost, then the firm should stop production.

The behavior of the firm in the long run becomes somewhat more complicated, since the barriers are low and entry is practically free. The presence of economic profit creates attractiveness for new firms that want to open their production. The equilibrium price is set at the level of average cost, so the firm loses economic profit and earns only normal profit in the long run.

In conditions of monopolistic competition, production efficiency and the efficiency of distribution (allocation) of resources are not achieved. A monopolistic competitor underproduces and overprices a competitive firm. Especially many complaints are made against excessive and annoying advertising, which is an integral part in all their diversity, leads to an increase in the standard of living of the population. Differentiation of the product allows to improve its quality and increase production efficiency.

BASIC CONCEPTS AND TERMS

Competition, competition as a process, competition as a situation, functions of competition, the “five forces of competition” model, functional competition, specific competition, intercompany competition, intra-industry and inter-industry competition, perfect and imperfect competition, price and non-price competition, unfair competition, sectoral market structure , quasi-competitive market, pure competition, profit maximization condition for a competitive firm, allocative efficiency, pure monopoly, natural monopoly, artificial monopoly, state monopoly, monopsony, discriminatory monopoly, bilateral monopoly, oligopoly, duopoly, oligopsony, monopolistic competition with product differentiation, barrier entry into the industry, concentration and centralization of production and capital, price discrimination, antitrust, mergers and cartel.