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How Oligopoliies limit competition from from rivals.

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Oligopolistic firms in the US try to limit competitions from their rivals. I provide a discussion on the interdependence of firms in oligopoly and how this affects firm behavior. I introduce the kinked demand curve model and discuss two ways that firms compete. One involves non-price competition through advertising and the other involves deterring would be competitors by building excess capacity. I provide a game theory framework for modeling the firms decisions.

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Solution Summary

A discussion on oligopoly theory and two ways in which oligopolistic firms limit competition from their rivals.

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The key feature of Oligopoly is that firms actions affect the profitability of other firms. One way to model oligopolists is with the kinked demand curve model. This is the most prominent approach in principles texts. Within the kinked demand curve model if one firm lowers its price others will as well. In the end all firms lose profits. However if one firm raises prices others do not follow suit and therefore steal market share away from the price raising firm. In this setting firms often pursue non-price competition. Firms might instead ...

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