978-1118808948 Chapter 9 Lecture Note

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CHAPTER NINE

OLIGOPOLY

OBJECTIVES

1. To provide an overview of Porter’s Five-Forces Framework.

(Oligopoly)

2. To compare market structures in terms of degree of concentration.

(Industry Concentration)

3. To present the basic models of quantity competition and price

competition.

4. To introduce the prisoner’s dilemma paradigm. (Price Wars and the

Prisoner’s Dilemma)

5. To explore other dimensions of competition: strategic commitments,

advertising, and bundling (Chapter Appendix).

TEACHING SUGGESTIONS

I. Introduction and Motivation

A. Points to Emphasize:

Oligopoly is the most important domain for competitive strategy. (After all, a

pure monopolist has no immediate competitors; each perfectly competitive

firm is too small to affect the market by itself.)

1. In oligopoly, one firm’s profit is affected not only by its own

decisions, but also by the decisions of its competitors.

2. Therefore, a firm’s profit-maximizing actions depend on the actions it

expects its competitors to take. Game theory (taken up in Chapter 10)

takes exactly this approach to competitive strategy.

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II. Teaching the “Nuts and Bolts”

A. The Basics

A traditional approach emphasizes the structural characteristics of markets

and the well-known models of quantity competition and price competition.

Time permitting, the instructor may wish to expand the chapter’s brief

overview. Students find market concentration easy to grasp and interesting.

Concentration ratios from the Bureau of the Census are available online at

http://www.census.gov/epcd/www/concentration.html

The instructor may wish to present to the class ratios for other goods and

services. In the business press, the ubiquitous “pie” charts depict market

shares for the major players in various industries. Students might be asked

to investigate the degree of concentration in a particular industry.

After covering the basics of quantity and price competition, the instructor

may choose to discuss applied topics (advertising and bundling) or present

additional game-theoretic examples. (If Chapter 10 is not assigned, it can be

used as a source of stand-alone examples.)

Chapter Nine’s introduction has been expanded to discuss the elements of the

five-forces model:

1. Threat of Entry;

2. Rivalry among Existing Competitors;

3. Pressure from Substitute Products;

4. Bargaining Power of Buyers; and

5. Bargaining Power of Sellers.

These concepts originated in: Michael Porter, “How Competitive Forces

Shape Strategy,” Harvard Business Review, March-April 1979, pp. 137-145,

available as Reprint 79209.

C. Recommended Problems

Problems 3, 6, 7, 8, and 12

ADDITIONAL MATERIALS

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I. Short Readings

S. Carey, “Delta , Alaska Airlines go to War over Seattle,” The Wall Street

Journal, June 303, 2014, p. B1.

S. McCartney, “The Most Expensive Airports to Fly to,” The Wall Street

Journal, May 23, 2014, pp. D1, D2.

J. Nicas and S. Carey, “Southwest Airlines, once a Brassy Upstart, is

showing its Age,” The Wall Street Journal, April 2, 2014, pp. A1, A14.

F. Manjoo, “T-Mobile turns an Industry on its Ear,” The New York Times,

February 27, 2014, p. B1, B10.

R. M. Frank, “Winner Takes All, but can’t We still Dream?” The New York

Times, February 23, 2014, p. BU5.

S. Ovide, G. Bensenger, and A. Efrati, “Tech Titans Clash in ‘Cloud’,” The

Wall Street Journal, February 4, 2013, p. B1.

J. Lessin, G. Bensinger, E. Rusli, and A. Efrati, “Apple vs Google vs

Facebook vs Amazon,” The Wall Street Journal, December 26, 2012, pp. A1,

A4.

R. Adams, “Many Formats, One Price,” The Wall Street Journal, May 16,

2011, p. B4

“How Long will Google’s Magic Last?” The Economist, December 4, 2010,

pp. 77-79.

“Better, Faster, Customizable: Who Will Win the Browser Battle?”

published online at: Knowledge@Wharton, November 23, 2010.

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N. Templin, “A Penny Shaved is a Penny Earned,” The Wall Street Journal,

March 18, 2010, p. D2.

“The Semiconductor Industry,” The Economist, October 17, 2009, pp. 71-73.

I. Brat, “Garbage Haulers Hoist Prices,” The Wall Street Journal, September

18, 2008, p. B1.

“The Harder Hard Sell: The Future of Advertising,” The Economist, June

26, 2004, p. 69.

“Merged Hospitals Gain Both Power and Critics,” The New York Times,

September 26, 2002, p. C1.

“Why the Sudden Rise in the Urge to Merge and Form Oligopolies?”

The Wall Street Journal, February 25, 2002, p. A1.

“Makers of Generic Baby Formula Win Round in Court,” The New York

Times, May 2, 2001, p. C5.

“Oligopoly,” The New York Times, June 11, 2000, p. WK1.

“Formula Fight: A Generic vs. the Giants,” The New York Times, September

26, 1999, p. BU1.

“A Matter of Trust,” The Economist, February 17, 2001, p. 78. (This article

discusses cooperation in the prisoner’s dilemma.)

“Movers and Shakers,” The Economist, January 24, 1998, p. 63. (This

article discusses theories of competitive strategy.)

II. Longer Readings

P. B. Ellickson, “Supermarkets as a Natural Oligopoly,” Economic Inquiry 51,

2013, pp. 1142-1154.

S. Borenstein and N. Rose, “How Airline Markets Work or do They?

Regulatory Reform in the Airline Industry,” in N. Rose (ed.), Economic

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Regulation and Its Reform: What Have We Learned? University of Chicago

Press, 2009.

S. Berry and P. Jia, “Tracing the Woes: An Empirical Analysis of the Airline

Industry, NBER Working Paper 14503, October 2008.

Akshay, R. R., M. E. Bergen, and S. Davis, “How to Fight a Price War,”

Harvard Business Review, March-April 2000, 107-116.

T. Bresnahan, S. Stern, and M. Trajtenberg, “Market Segmentation and the

Sources of Rents from Innovation: Personal Computers in the Late 1980’s,”

Rand Journal of Economics, 1997, S17-S44.

III. Recommended Cases:

Brief History of the Browser Wars (9-703-517), Harvard Business School,

2003.

Apple Computer-1999, (9-799-108), Harvard Business School, 1999.

Teaching Note, 5-799-150.

Competition and Business Strategy in Historical Perspective,

(9-798-010), Harvard Business School, 1998.

BMG Entertainment, (9-701-003), Harvard Business School, 2000.

Teaching Note, 5-701-049.

The Pharma Giants: Ready for the 21st Century? (9-698-070), Harvard

Business School, 1998.

Cola Wars Continue: Coke vs. Pepsi in the 21st Century (9-702-442),

Harvard Business School, 1995. Teaching Note (5-703-403).

Strategic Countermoves: Coca-Cola vs Pepsi, (9-795-133), Harvard Business

School, 1995.

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IV. Quips and Quotes

Advertising defined: Arresting the human intelligence long enough to get

money from it.

People of the same trade seldom meet together, even for merriment and

diversion, but the conversation ends in a conspiracy against the public, or in

some contrivance to raise prices. (Adam Smith)

Putnam: Do you have a suggestion for me?

Crandall: Yes, I have a suggestion for you. Raise your goddamn fares 20

percent. I’ll raise mine the next morning.

Putnam: Robert, we . . .

Crandall: You’ll make more money and I will, too.

Putnam: We can’t talk about pricing!

Crandall: Oh [expletive deleted], Howard. We can talk about any

goddamn thing we want to talk about.

(From a telephone conversation between Robert Crandall, CEO of American

Airlines, and Howard Putnam, CEO of Braniff Airways, on February 21,

1982. The telephone call, unknown to Crandall, was taped. After finding out

about the call, the Justice Department filed a suit accusing Robert Crandall of

breaking the antitrust laws by proposing to fix prices.

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