Oligopoly Models Part I

This set explores oligopoly market structures, specifically focusing on price leadership and the Stackelberg quantity leadership model, with real-world examples from the banking, grocery, and petrol industries.

Oligopoly

A market structure representing a "grey area" between perfect competition and monopoly, characterized by high concentration and competition among a few large firms.

Price Leadership Model

A model where one leader with a substantial market share sets the price, while a fringe of competitive followers act as price-takers.

Organization of Petroleum Exporting Countries (OPEC)

An organization believed to operate as a cartel and a price leader in the global crude oil market by using production quotas to restrict output and increase prices.

Residual Demand ($R(p)$)

The market demand that remains for the leader after followers have supplied their portion at a given price, defined as $R(p) = D(p) - S_2(p)$.

Stackelberg's Model

A quantity leadership model often found in technology R&D industries where a leader firm releases products first, and follower firms respond by reverse-engineering or copying.

Reaction Function

A mathematical relationship, such as $y_2 = f(y_1)$, that determines the follower's best-response quantity based on the leader's chosen output.

Isoprofit Curves

Curves representing all combinations of quantities ($y_1, y_2$) that yield the same level of profit for a firm, denoted as $y_2 = g(\text{π}_1, y_1)$.

Quotas

Maximum production allowances assigned to each member country within a cartel like OPEC to control supply and maintain higher oil prices.

Dominant Firm Model

A specific type of price leadership where a leader with a large market share or cost advantage faces a fringe of smaller, competitive price-taking firms.

Australian Grocery Retailers

A specific oligopoly example where Woolworths and Coles combined maintain an $80\%$ market share.

Australian Petrol Industry

An oligopoly where $98\%$ of the unleaded market is controlled by four companies: Shell, Caltex, BP, and Mobil.

Australian Banking Industry

A market dominated by four major players: ANZ, Westpac, NAB, and Commonwealth Bank.