The hallmark of an oligopolistic market is Characteristics of an oligopoly. Oligopoly not based on collusion
Oligopoly and its main models.
1. The essence of the oligopoly and its characteristic features
2.Key indicators for measuring market concentration (IndexHerfindahl - Hirschman)
3. Cournot model (duopoly)
4. Oligopoly based on collusion
5. Oligopoly not based on collusion
6. Cost models
1) The essence of oligopoly and its characteristic features
Oligopoly- a type of market structure in which several firms and each of them is able to independently influence the price.
It includes:
Aluminum production;
Copper production;
Steel production;
Automotive industry;
Refrigerators, vacuum cleaners, etc.
Main features:
1) a small number of firms dominating the market
2) products can be homogeneous or differentiated
3) restrictions on access to the market for new firms (natural barriers include: economies of scale, which can make the coexistence of many firms in the market unprofitable, because this requires large financial resources. We are talking about a natural oligopoly. In addition, patenting and licensing firms may also take strategic actions that make it difficult for new firms to enter a given market.)
4) each firm is able to influence the market price, but this depends on the nature of the interaction of firms. Collusion has a significant impact on pricing
5) the general interdependence of firms (an oligopolist must anticipate the reaction of competitors to a change in their pricing strategy, given that competitors can predict the situation. All this is called oligopolistic relationship.
2) Key indicators for measuring market concentration (Index Herfindahl - Hirschman)
In practice, when studying this or that market structure, they use such a characteristic as its concentration. This is the degree of dominance in the market by one or more firms. There is an indicator that reflects this concentration. This is the concentration ratio - the percentage of all sales for a certain number of firms. The most common is the "four-firm share": their sales are divided by the sales of the entire industry. There may be a “share of six firms”, “a share of eight firms”, etc. But this indicator has a limitation: it does not take into account the difference between monopolies and oligopolies, because the coefficient will be the same where one firm dominates the market and where 4 firms share the market. The disadvantage is overcome with the help of the Herfindahl-Hirschman index. It is calculated by squaring the market share of each firm and summing the results.
H \u003d d 1 2 + d 2 2 + ... + d n 2, where
n is the number of competing firms;
d 1 , d 2 … dn - percentage of firms
With increasing concentration, the index increases. Its maximum value is inherent in a monopoly, where it is equal to 10,000. Let's consider what the choice of the optimal production volume and price is like under an oligopoly. So this is the choice that maximizes profit. Since the choice depends on the behavior of firms, there is no single model of firm behavior in an oligopoly. There are various models:
1) Cournot model
2) model based on conspiracy
3) model. not based on collusion (prisoner's dilemma)
4) tacit collusion (leadership in general)
3) Cournot model (duopoly)
The model was introduced in 1938 by the French economist Augustine Cournot.
Duopoly- a special case of oligopoly, when only two firms compete with each other in the market.
Firms produce homogeneous goods and the market demand curve is known.
The output of one firm a 1 changes depending on how, in the opinion of its management, a 2 will grow. As a result, each firm builds its own response curve. It tells how much the firm will produce at the expected output of its competitor. In equilibrium, each firm sets its output according to its response curve, so the output equilibrium is at the intersection of the two response curves. This equilibrium is the Cournot equilibrium. Here, each duopolist sets the output that maximizes his profit for a given competitor's output. This equilibrium is an example of what in game theory is called the Nash equilibrium, where each poker player does the best that can be done given the opponent's actions. As a result, no player has an incentive to change his behavior. This game theory was described by Neumann and Mongerstern in their work "Game Theory and Economic Behavior" (1944).
4) Oligopoly based on collusion.
Collusion- a de facto agreement between firms in an industry to fix prices and production volumes.
In many industries collusion is considered illegal. Conspiracy factors include:
a) the existence of a legal framework
b) high concentration of sellers
c) about the same average costs for firms in the industry
d) the inability of new firms to enter the market
It is assumed that in conspiracy, each firm will equalize its prices when prices go down and when prices go up. In this case, 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 collude, they construct a contract curve that shows the various combinations of output of the two firms that maximize profits. Collusion is much more profitable for firms, in comparison with perfect equilibrium and in comparison with Cournot equilibrium, since they will produce less output while charging a better price.
(question 5) Oligopoly not based on collusion
If there is no collusion (inherent in the United States), then oligopolists, when setting prices, face prisoner's dilemma. This is a classic example of game theory in economics.
The two prisoners were charged with a joint crime. They sit in different cells and cannot communicate with each other. If both confess, then the prison term for each will be 5 years. If not, then the case is not completed and everyone will receive 2 years. If the first confesses and the other does not, then the first will receive 1 year in prison, and the second 10 years.
There is a matrix of possible outcomes:
Prisoners face a dilemma: to confess or not to commit a crime. If they could agree not to confess, they would receive 2 years in prison. But, if such an opportunity existed, they could not trust each other. If the first prisoner does not confess, then he runs the risk that another will be able to take advantage of this. Therefore, whatever the first does, it is more profitable for the second to confess. Then both are more likely to confess and go to prison for 5 years.
Oligopolists also often face a prisoner's dilemma. Let there be two firms. They are the only sellers on the market for this product. They are faced with a dilemma: set a high or low price?
1) If both firms set a high price, they will receive 20,000,000 rubles each.
2) If they set a relatively low price, they will receive 15,000,000 rubles each.
3) If the first firm raises the price, and the second lowers it, then the first will receive 10,000,000 rubles, and the second 30,000,000 rubles at the expense of the first.
Conclusion: it is obvious that it is beneficial for each firm to set a relatively low price, regardless of how the competitor does and get 15,000,000 rubles each. The Prisoner's Dilemma explains price rigidity under oligopoly.
(question 6) Cost models
A broken "demand curve" describes the behavior of a firm that does not collude with competitors. The model is based on the fact that there are possible options for the behavior of market participants. When one of the competitors changes the price, others will be able to choose one of the possible solutions:
1) Align prices and adjust to the new price
2) Do not respond to price changes by one of the competitors
3) Let one firm raise prices, then the rest will raise prices after this firm. The firms in the industry will lose some sales, so if one firm increases the price, the others do not respond.
4) Let one firm on the market lower prices, then if competitors do not lower prices, then the firm takes away some of the buyers from them. So if one firm cuts prices, other firms do the same.
Conclusion: to reduce prices following a competitor's price decrease and not respond to the latter's price increase is the essence of a broken "demand curve" in the oligopoly market.
There is a broken demand curve in an oligopoly market.
P-price of a unit of production;
Q-number of products;
D-demand;
P about- existing market price
If firm A raises the price above the existing base price (P o), then competitors most likely will not raise the price. As a result, the company will lose some of its customers. Demand for its products above point A is highly elastic. If firm D lowers its price, competitors will also lower their price. Therefore, at a price below Pо, demand is less elastic. Firm A's price cuts can also cause a price war, where firms take turns cutting prices until some of them lose money and shut down production. Therefore, in a war, the strongest wins. But the policy is risky, so it is not known which of the firms is more “brisk”.
Cost + model The firm determines the level of costs per unit of output, and then adds to the costs the planned level of profit (approximately 10% -15%). The principle is used where products are differentiated (for example, in the automotive industry). The model shows that the firm does not adjust its costs to the market price. Such behavior of the company is possible in the absence of tangible pressure from competitors.
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Oligopoly and its main models.
1. The essence of the oligopoly and its characteristic features
2.Key indicators for measuring market concentration (IndexHerfindahl - Hirschman)
3. Cournot model (duopoly)
4. Oligopoly based on collusion
5. Oligopoly not based on collusion
6. Cost models
1) The essence of oligopoly and its characteristic features
Oligopoly- a type of market structure in which several firms and each of them is able to independently influence the price.
It includes:
Aluminum production;
Copper production;
Steel production;
Automotive industry;
Refrigerators, vacuum cleaners, etc.
Main features:
1) a small number of firms dominating the market
2) products can be homogeneous or differentiated
3) restrictions on access to the market for new firms (natural barriers include: economies of scale, which can make the coexistence of many firms in the market unprofitable, because this requires large financial resources. We are talking about a natural oligopoly. In addition, patenting and licensing firms may also take strategic actions that make it difficult for new firms to enter a given market.)
4) each firm is able to influence the market price, but this depends on the nature of the interaction of firms. Collusion has a significant impact on pricing
5) the general interdependence of firms (an oligopolist must anticipate the reaction of competitors to a change in their pricing strategy, given that competitors can predict the situation. All this is called oligopolistic relationship.
2) Key indicators for measuring market concentration (Index Herfindahl - Hirschman)
In practice, when studying this or that market structure, they use such a characteristic as its concentration. This is the degree of dominance in the market by one or more firms. There is an indicator that reflects this concentration. This is the concentration ratio - the percentage of all sales for a certain number of firms. The most common is the "four-firm share": their sales are divided by the sales of the entire industry. There may be a “share of six firms”, “a share of eight firms”, etc. But this indicator has a limitation: it does not take into account the difference between monopolies and oligopolies, because the coefficient will be the same where one firm dominates the market and where 4 firms share the market. The disadvantage is overcome with the help of the Herfindahl-Hirschman index. It is calculated by squaring the market share of each firm and summing the results.
H \u003d d 1 2 + d 2 2 + ... + d n 2, where
n is the number of competing firms;
d 1 , d 2 … dn - percentage of firms
With increasing concentration, the index increases. Its maximum value is inherent in a monopoly, where it is equal to 10,000. Let's consider what the choice of the optimal production volume and price is like under an oligopoly. So this is the choice that maximizes profit. Since the choice depends on the behavior of firms, there is no single model of firm behavior in an oligopoly. There are various models:
1) Cournot model
2) model based on conspiracy
3) model. not based on collusion (prisoner's dilemma)
4) tacit collusion (leadership in general)
3) Cournot model (duopoly)
The model was introduced in 1938 by the French economist Augustine Cournot.
Duopoly- a special case of oligopoly, when only two firms compete with each other in the market.
Firms produce homogeneous goods and the market demand curve is known.
The output of one firm a 1 changes depending on how, in the opinion of its management, a 2 will grow. As a result, each firm builds its own response curve. It tells how much the firm will produce at the expected output of its competitor. In equilibrium, each firm sets its output according to its response curve, so the output equilibrium is at the intersection of the two response curves. This equilibrium is the Cournot equilibrium. Here, each duopolist sets the output that maximizes his profit for a given competitor's output. This equilibrium is an example of what in game theory is called the Nash equilibrium, where each poker player does the best that can be done given the opponent's actions. As a result, no player has an incentive to change his behavior. This game theory was described by Neumann and Mongerstern in their work "Game Theory and Economic Behavior" (1944).
4) Oligopoly based on collusion.
Collusion- a de facto agreement between firms in an industry to fix prices and production volumes.
In many industries collusion is considered illegal. Conspiracy factors include:
a) the existence of a legal framework
b) high concentration of sellers
c) about the same average costs for firms in the industry
d) the inability of new firms to enter the market
It is assumed that in conspiracy, each firm will equalize its prices when prices go down and when prices go up. In this case, 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 collude, they construct a contract curve that shows the various combinations of output of the two firms that maximize profits. Collusion is much more profitable for firms, in comparison with perfect equilibrium and in comparison with Cournot equilibrium, since they will produce less output while charging a better price.
(question 5) Oligopoly not based on collusion
If there is no collusion (inherent in the United States), then oligopolists, when setting prices, face prisoner's dilemma. This is a classic example of game theory in economics.
The two prisoners were charged with a joint crime. They sit in different cells and cannot communicate with each other. If both confess, then the prison term for each will be 5 years. If not, then the case is not completed and everyone will receive 2 years. If the first confesses and the other does not, then the first will receive 1 year in prison, and the second 10 years.
There is a matrix of possible outcomes:
Prisoners face a dilemma: to confess or not to commit a crime. If they could agree not to confess, they would receive 2 years in prison. But, if such an opportunity existed, they could not trust each other. If the first prisoner does not confess, then he runs the risk that another will be able to take advantage of this. Therefore, whatever the first does, it is more profitable for the second to confess. Then both are more likely to confess and go to prison for 5 years.
Oligopolists also often face a prisoner's dilemma. Let there be two firms. They are the only sellers on the market for this product. They are faced with a dilemma: set a high or low price?
1) If both firms set a high price, they will receive 20,000,000 rubles each.
2) If they set a relatively low price, they will receive 15,000,000 rubles each.
3) If the first firm raises the price, and the second lowers it, then the first will receive 10,000,000 rubles, and the second 30,000,000 rubles at the expense of the first.
Conclusion: it is obvious that it is beneficial for each firm to set a relatively low price, regardless of how the competitor does and get 15,000,000 rubles each. The Prisoner's Dilemma explains price rigidity under oligopoly.
(question 6) Cost models
A broken "demand curve" describes the behavior of a firm that does not collude with competitors. The model is based on the fact that there are possible options for the behavior of market participants. When one of the competitors changes the price, others will be able to choose one of the possible solutions:
1) Align prices and adjust to the new price
2) Do not respond to price changes by one of the competitors
3) Let one firm raise prices, then the rest will raise prices after this firm. The firms in the industry will lose some sales, so if one firm increases the price, the others do not respond.
4) Let one firm on the market lower prices, then if competitors do not lower prices, then the firm takes away some of the buyers from them. So if one firm cuts prices, other firms do the same.
Conclusion: to reduce prices following a competitor's price decrease and not respond to the latter's price increase is the essence of a broken "demand curve" in the oligopoly market.
There is a broken demand curve in an oligopoly market.
P-price of a unit of production;
Q-number of products;
D-demand;
P about- existing market price
If firm A raises the price above the existing base price (P o), then competitors most likely will not raise the price. As a result, the company will lose some of its customers. Demand for its products above point A is highly elastic. If firm D lowers its price, competitors will also lower their price. Therefore, at a price below Pо, demand is less elastic. Firm A's price cuts can also cause a price war, where firms take turns cutting prices until some of them lose money and shut down production. Therefore, in a war, the strongest wins. But the policy is risky, so it is not known which of the firms is more “brisk”.
Cost + model The firm determines the level of costs per unit of output, and then adds to the costs the planned level of profit (approximately 10% -15%). The principle is used where products are differentiated (for example, in the automotive industry). The model shows that the firm does not adjust its costs to the market price. Such behavior of the company is possible in the absence of tangible pressure from competitors.
When industries are dominated by several firms, such industries are called oligopoly or
oligopoly name the type of market in which a few firms control the bulk of it. At the same time, product differentiation can be both small (oil) and quite extensive (cars). An oligopoly is characterized by restrictions on the entry of new firms into the industry, which are associated with economies of scale, high advertising costs, existing patents and licenses, and actions taken by competitors.
Characteristic signs of an oligopoly:
1. Small number of large firms in the industry(oligopolies can be homogeneous (oil, gas) and differentiated (cars)). With the characteristic dominance of oligopolies, the rule is applied: for the top 4 firms in total production in the industry (if more than 60%, then the industry is oligopolistic. Oligopolies usually exist in industries that produce technically complex goods or goods produced in small quantities.
2. A characteristic feature of an oligopoly is the merger and collusion of firms. The motives for merging can be different: voluntary (monopolists), forced (a large firm forces small firms to merge), general absorption (buying up small firms that are going bankrupt, etc.).
3. Unlike pure monopoly in the condition of monopolistic competition (industry), each firm is forced to calculate the response to its changes (the general interdependence of firms on a few firms).
Character traits:
1. several very large firms;
2. the product is standardized or differentiated;
3. price control limits interdependence;
4. the possibility of collusion on price, market division, etc.;
5. there are barriers to new firms entering the industry;
6. non-price competition;
7. supply and demand are not very elastic.
An oligopoly exists when the number of firms in an industry is so small that each firm must take into account the reaction of competitors when formulating its pricing policy. Another feature of an oligopoly is the interdependence of firms' decisions on prices and output.
Oligopoly types:
1. homogeneous (dense) - when firms produce the same product;
2. differentiated - when similar but not identical products are produced;
3. hard - when there are 3-4 firms in the industry;
4. vague - when there are 6-7 firms in the industry;
5. based on collusion;
6. not based on collusion firms are independent, but the leader sets the parameters of the market;
7. based on fusion association;
8. based on the production of technically complex goods, when there are few large firms in the industry, where there is a positive effect of scale of production.
Relationship types
According to the concentration of sellers in the same market, oligopolies are divided into dense and sparse.
To dense oligopolies include such industry structures that are represented on the market by 2-8 sellers.
To the discharged oligopolies include market structures that include more than 8 business entities.
Based on the nature of the products offered, oligopolies can be divided into ordinary and differentiated.
Ordinary oligopoly associated with the production and supply of standard products.
Differentiated oligopolies formed on the basis of the production of a diverse range of products.
General assessment of oligopolistic structures
Positive rating oligopolistic structures is associated primarily with the achievements of scientific and technological progress. Oligopolies have huge financial resources, as well as significant influence in the political and economic circles of society, which allows them to participate in the implementation of profitable projects and programs financed from public funds with varying degrees of accessibility.
Oligopoly- a market in which there are several firms, each of which controls a significant share of the market (from the Greek "oligos" - few, few). This is the predominant form of the modern market structure.
Signs of an oligopoly:
1. The presence on the market of several large firms (from 3 to 15 - 20).
2. The products of these firms can be both homogeneous (the market for raw materials and semi-finished products) and differentiated (the market for consumer goods). Accordingly, pure and differentiated oligopolies are divided.
3. Carrying out an independent pricing policy, however, price control is limited by the mutual dependence of firms and is to some extent implemented through agreements between them.
4. Significant restrictions on entering the market associated with the need for significant capital investments to create an enterprise in connection with the large-scale production of oligopolistic firms. In addition, there are barriers that are characteristic of a monopoly - patents, licenses, etc.
An important feature of such a market is also that firms can take a number of actions (regarding sales volumes and prices of goods) aimed at preventing potential competitors from entering the market.
5. The inexpediency of price competition and the advantage of non-price competition, in which successful solutions can provide market advantages for some time.
6. The dependence of the strategic behavior of each firm (determining the price and output volumes, starting an advertising campaign, investing in expanding production) on the reaction and behavior of competitors, which affects the market equilibrium.
In general, an oligopoly occupies an intermediate position between a monopoly and perfect competition (the equilibrium price in the oligopoly market is lower than the monopoly, but higher than the competitive price).
There are many variants of oligopoly: there can be either 2-4 leading firms (hard oligopoly) or 10-20 (soft oligopoly) in the industry. The mechanisms of interaction between firms in these conditions will differ. General interdependence makes it difficult to predict the corresponding reaction of a competitor and makes it impossible to calculate demand and marginal revenue for an oligopolist.
Oligopolistic behavior implies incentives for concerted action in setting prices. The large size of firms does not contribute to their market mobility, so collusion between firms in order to maintain prices, limit output and jointly maximize profits comes from the greatest benefits.
Collusion is an explicit or tacit agreement between firms in an industry to fix prices and outputs or to limit competition between them. Collusion is most likely given its legitimacy and a small number of firms. Differences between firms in products, in costs, in demand, the ability to reduce prices in secret from others - make it difficult to collude.
If several firms in an oligopolistic market are approximately the same in size and level of average costs, then they will have the same price level and output that maximize profits. A joint pricing policy will actually turn an oligopolistic market into a pure monopoly. All this pushes the oligopolists to the conclusion cartel agreements.
If the collusion is legal, manufacturers of the same product often enter into an agreement to share the market, and a group of such firms forms cartel. In such an agreement, for all its participants, their shares in the volume of production and sales, prices for goods, conditions for hiring labor, and exchanging patents are established. Its goal is to increase prices above competitive levels, but not to limit the production and marketing activities of participants. From here the main problem of the cartel- this is the coordination of decisions of its participants regarding the establishment of a system of restrictions (quotas) for each firm.
Question 22. Determining the price and volume of production in an oligopoly. Pricing models in an oligopoly
There is no general theory of pricing in an oligopoly. There are a number of models that explain the market behavior of an oligopoly depending on what assumptions the firm has about the reaction of its competitors.
The specific market model for an oligopolist is shown in Fig. one.
Rice. 1. Broken line of demand
Broken Demand Curve Model(R. Hall, Hitch, P.-M. Sweezy, 1939) explains why an oligopolistic firm is reluctant to abandon its price-output decision, due to which prices in the oligopoly have a certain stability in the short run with some change in the value costs (which cannot be said of a perfectly competitive market).
Suppose there are three firms x, y and z in the market. The market price was fixed at R o. Consider how firms y and z will react to a price change by firm x.
If firm x raises its price above P o, then firms y and z will most likely not follow and leave prices at P o. As a result, firm x will lose customers, and firms y and z will expand their market share. Thus, the price increase is not profitable for firm x; the demand for its products in section BA is quite elastic.
If firm x cuts its price to increase sales, competitors are likely to retaliate with a price cut to protect their market share. Therefore, firm x will not receive a significant increase in demand (demand in section AD is relatively inelastic).
As a result of different reactions of competitors to price changes, the demand curve will take the form of BAD. Both of the most probable options for the consequences of a price change do not bring a significant positive result to the company (price reduction - an insignificant increase in sales, price increase - a decrease in sales). Therefore, we can assume that prices in such a market will be stable (firms pursue a policy of "price rigidity").
This assumption can be confirmed as follows. The bend in the demand curve at point A corresponds to a break in the MR line, which in Fig. 1 is represented by the broken line BCEF. If the MC curve intersects it on the CE segment (all points of which correspond to the Cournot point by definition), the firm has no reason to refuse the price P o (i.e., a change in MC, expressed in the intersection of several MC curves of the CE segment, will not cause a price change) . Some increase in costs does not lead to a change in price until the MC curve rises above point C.
If there is an increase in demand for this product, then the demand line BAD will shift to the right upwards, and along with it the line MR will shift to the right, including its vertical section. Given the intersection of the MC line with the MR line on its vertical section, the optimal price for the oligopolist will remain the same price, although the optimal output volume increases. Thus, even with a change in demand for products, the oligopolist is not inclined to change the price, but changes the volume of production.
As a result, according to this model, we can formulate Cournot equilibrium: no firm is interested in changing the price of its product until its competitor changes the price of its product. This is due to the fact that after the firm changes the original price, in an oligopoly, it will no longer be able to return to it. As a result, equilibrium in an oligopoly can be established at a price corresponding to the monopoly one. However, this outcome is less likely as the number of competitors in the industry increases: it increases the likelihood that someone can lower the price of their product, upsetting the market equilibrium.
The broken demand curve model has two disadvantages:
1) it is not explained why the current price was exactly P o; it is also impossible to explain how this price was established initially (i.e., the model does not explain the principles of oligopolistic pricing);
2) as economic practice shows, prices are not as inflexible as this demand curve implies: in an oligopoly, they have a clear upward trend.
All oligopoly models have common features that can be seen in duopoly models(Antoine Cournot, 1838). Duopoly- a special case of an oligopoly, where two producers of homogeneous products participate, each of which is able to satisfy all effective demand in a given market. Such a structure is often found in regional markets and reflects all the characteristic features of an oligopoly. The essence of this model- each of the competitors determines the optimal supply volume for itself with a given supply volume of the other, and the combination of these volumes reveals the market price. Thus, this model describes the process of pricing in an oligopoly. Cournot's basic premise was an assumption about the response of each firm to the behavior of competitors. It's obvious that duopoly equilibrium is that each duopolist sets the output that maximizes his profit given his competitor's output, and so neither has an incentive to change that output. At prices above the point of intersection of the reaction lines, each firm has an incentive to reduce the price set by a competitor, at prices below the point of intersection - on the contrary.
Thus, under this assumption, there is only one price that the market can set. It can also be shown that the equilibrium price moves gradually from the monopoly price to the price equal to marginal cost. Consequently, Cournot equilibrium in an industry where there is only one firm, is achieved at a monopoly price; in an industry with a significant number of firms - at a competitive price; and in an oligopoly, it fluctuates within these limits.
The development of this model is leader pricing model, in which the leader sets not the volume of his production, but the price of his products.
In an oligopoly market, a monopoly price can be set without explicit agreement between competitors. But the more competitors, the more likely it is that one of them will reduce the price of their products for the sake of a temporary benefit. For example, the struggle of two oligopolists for a buyer by setting ever lower prices will eventually come to an equilibrium between them in the form (i.e., the price will fall to the level of perfect competition).
R = MS = AC
This case, the so-called price wars, described Bertrand model, according to which firms consistently reduce prices to the level of average costs, trying to force competitors out of the market.
Typically, oligopolistic firms set prices and divide markets in such a way as to avoid the prospect of price wars and their adverse effects on profits. Therefore, in modern conditions, their price competition most often leads to agreements.
The easiest way to implement a constant price ratio strategy is to cost-plus pricing. It is used because of the inherent market uncertainty about the demand for a product and the difficulty of determining marginal cost. The principle, "cost plus," is a pragmatic way of dealing with the problem of actually estimating marginal revenue and marginal cost, in which certain standard costs are taken to determine the price, to which economic profit is added in the form of a premium. This method does not require an in-depth study of demand curves, marginal revenue and cost curves, which vary by product. For a coordinated pricing policy, it is enough for firms to agree on the amount of this premium.
Pricing using such a premium on costs guarantees the firm sufficient revenue to cover variable costs, fixed costs, and the opportunity cost of using factors of production.
In addition to all of the above, in the analysis of oligopolistic pricing, it is increasingly used game theory. It is often noted that oligopoly is a game of characters in which each player must anticipate the opponent's actions. After weighing the possible consequences of different decisions, each firm will realize that it is most rational to assume the worst.