Samuelson - Managerial Economics 7e

Page 376

Oligopoly

common technology standards (for high-definition television or DVDs, for instance) so as to promote overall market growth. Firms in the same market also might join in shared research and development programs. Coopetition also occurs when a company and its input supplier cooperate to streamline the supply chain, improve product quality, or lower product cost. In short, oligopoly analysis embraces both the threat of substitutes and the positive impacts of complementary activities. Finally, the potential bargaining power of buyers and suppliers should not be overlooked. For instance, the pricing behavior of a final goods manufacturer depends on the nature of the customers to whom it sells. At one extreme, its customers—say, a mass market of household consumers—may have little or no bargaining power. The manufacturer has full discretion to set its price as it wants (always taking into account, of course, overall product demand and the degree of competition from rival firms). At the other extreme, a large multinational corporate buyer will have considerable bargaining clout. Typically, such a buyer will have the power to negotiate the final terms of any contract (including price), and indeed it might hold the balance of power in the negotiation. (The producer might need the large buyer much more than the buyer needs the producer.) In the extreme, the buyer might organize a procurement and ask for competitive bids from would-be goods producers. In this way, the buyer uses its power to maximize competition among the producers so as to secure the best contract terms and price. (Negotiation and competitive bidding are the subjects of Chapters 15 and 16, respectively.) Of course, the same analysis applies to the firm’s relationships with its suppliers. We know from Chapter 7 that the firm will receive the best possible input prices if its suppliers compete in a perfectly competitive market. On the other hand, if the number of suppliers is limited or if actual inputs are in short supply, bargaining power shifts to the suppliers who are able to command higher prices.

Industry Concentration As noted earlier, an oligopoly is dominated by a small number of firms. This “small number” is not precisely defined, but it may be as small as two (a duopoly) or as many as eight to ten. One way to grasp the numbers issue is to appeal to the most widely used measure of market structure: the concentration ratio. The four-firm concentration ratio is the percentage of sales accounted for by the top four firms in a market or industry. (Eight-firm and twenty-firm ratios are defined analogously.) Concentration ratios can be computed from publicly available market-share information. Ratios also are compiled in the U.S. Census Bureau, released by the government at five-year intervals. Table 9.1 lists concentration ratios for selected goods and services compiled from both sources. Notice the progression from highly concentrated to less concentrated industries.

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Bargaining

1min
page 439

Market Entry

4min
pages 437-438

Equilibrium Strategies

18min
pages 428-436

Strategic Commitments

4min
pages 399-400

Price Rigidity and Kinked Demand

3min
pages 389-390

Price Wars and the Prisoner’s Dilemma

17min
pages 391-398

Competition among Symmetric Firms

5min
pages 386-388

Concentration and Prices

6min
pages 381-383

Industry Concentration

8min
pages 376-380

Natural Monopolies

32min
pages 355-371

Five-Forces Framework

3min
pages 374-375

Barriers to Entry

14min
pages 345-351

Cartels

6min
pages 352-354

Tariffs and Quotas

22min
pages 329-341

Private Markets: Benefits and Costs

21min
pages 319-328

Decisions of the Competitive Firm

4min
pages 312-314

Multiple Products

37min
pages 282-303

Shifts in Demand and Supply

2min
pages 310-311

Market Equilibrium

8min
pages 315-318

Economies of Scope

6min
pages 275-277

Returns to Scale

8min
pages 270-274

A Single Product

3min
pages 278-279

The Shut-Down Rule

3min
pages 280-281

Short-Run Costs

8min
pages 260-264

Long-Run Costs

10min
pages 265-269

Profit Maximization with Limited Capacity: Ordering a Best Seller

6min
pages 257-259

Fixed and Sunk Costs

7min
pages 254-256

Opportunity Costs and Economic Profits

8min
pages 250-253

Multiple Plants

1min
page 234

Returns to Scale

4min
pages 221-222

Estimating Production Functions

1min
page 233

Forecasting Performance

5min
pages 186-188

Optimal Use of an Input

4min
pages 219-220

Barometric Models

2min
page 185

Fitting a Simple Trend

14min
pages 176-184

Interpreting Regression Statistics

10min
pages 164-168

Potential Problems in Regression

8min
pages 169-173

Time-Series Models

2min
pages 174-175

Uncontrolled Market Data

2min
page 155

Price Discrimination

9min
pages 122-125

Consumer Surveys

4min
pages 152-153

Optimal Markup Pricing

8min
pages 118-121

Controlled Market Studies

2min
page 154

Other Elasticities

4min
pages 111-112

Maximizing Revenue

1min
page 117

General Determinants of Demand

2min
page 105

The Demand Function

4min
pages 101-102

Step 6: Perform Sensitivity Analysis

9min
pages 35-38

The Aim of This Book

10min
pages 43-47

Public Decisions

8min
pages 39-42

Step 2: Determine the Objective

4min
pages 30-31

Step 3: Explore the Alternatives

2min
page 32

Step 4: Predict the Consequences

2min
page 33

Marginal Revenue

1min
page 67

Step 5: Make a Choice

2min
page 34
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