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The Effect of Competition
• Monopoly
• Oligopoly
• Bertrand’s model
– Quantity can be easily adjusted.
• Cournot’s model
– Quantities are chosen first, and can’t be easily altered;
then prices are set.
Monopolist
Market
price
Demand:
p=5-q
P* = 3
=4
c=1
Quantity
q* = 2
Bertrand model of competition
Price
LRAC
1
07/14/04
2
3
# of firms
4
B189 - Simon Rodan
5
6
4
The Oil Super Majors
Sales
($B)
Net Income
($B)
ROE
Royal Dutch Shell
475
26
5%
Exxon
434
45
10%
BP
377
17
5%
Chevron
230
27
12%
Total SA
222
14
6%
Data are for FY2011
Expected Duopoly Profit
Market
price
Demand:
p=5-q
P* = 3
2=2 2=2
c=1
Quantity
q* = 2
Cournot’s Duopoly Prediction
Market
price
1 and 2=3.54
P* = 2.33
=.77
=.77
Demand:
p=5-q
c=1
Quantity
Simulation
q* = 2.66
Cournot’s Duopoly Prediction
Market
price
1,2 and 3=3
Demand:
p=5-q
P* = 2
=
=
=
c=1
Quantity
q* = 3
Potential price
Cournot model of competition (quantity)
LRAC
1
07/14/04
2
3
# of firms
4
B189 - Simon Rodan
5
6
9
Firm Size Industry Profile
Sales
CR4 = 80%
Sales
CR4 = 8%
Industry concentration
120
100
80
Sales
• Industries with few
firms are
‘concentrated’
• Industries with many
firms are ‘fragmented’
• However, most
industries have both
large and small firms
60
40
20
0
1
11
21
31
Firm rank (by sales)
41
Some more examples
Sales
CR4 = 9%
CR4 = 35%
CR4 = 62%
Assessing concentration
• Four Firm Concentration Ratio (CR4)
– Add up the sales for all firms in the industry
– Add up the sales of the four largest firms in
the industry
– Divide the second number by the first
• OR
– Add the market shares of the four largest
firms (this is exactly equivalent to the first
method)