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hi everybody let's in this video look at
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oligopoly in detail focusing on the
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Kingdom man curve model of studying
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oligopoly we're gonna look at it in the
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same way as always we're gonna start
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with characteristics were then gonna go
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to a king demand curve diagram then
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we're gonna look at the conclusions that
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we can take from this this is part one
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of our oligopoly study we can also use
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game theory to map oligopoly behavior
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that's going to be the next video so
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stay tuned for that after this let's go
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straight into the characteristics that
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define oligopoly a very very realistic
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market structure here well Oleg means
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few so we can say that there are a few
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firms that dominate the market being
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more precise than that we can say that
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there is a high concentration ratio what
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does that mean well we normally say as
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economists no more than seven firms with
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collectively around 70% market share
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that's kind of how we define an
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oligopoly these firms will have
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differentiated goods unique goods which
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means that they are price makers here we
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say there are high barriers to entry and
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exit an oligopolistic markets the major
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barriers to entry startup costs
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economies of scale sunk costs brand
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loyalty they tend to be quite strong we
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say that in oligopolistic markets there
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is interdependence this is a defining
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feature of an oligopoly market along
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with number one probably the most
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important characteristic here what is
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interdependence interdependence means
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that firms don't make decisions on their
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own independently no they make their
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choices they make decisions based on the
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actions and all the reactions of rival
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firms so their owners made decisions
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independently on their own they think
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about what their rivals are going to do
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they think about rival firms first and
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then make decisions
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so that's interdependence firms make
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decisions based on the actions and or
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reactions of rival firms very important
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characteristic and because of that we
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often see price rigidity we're going to
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study how in a second using the kingdom
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anchor model so if there isn't much
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competition on price prices tend to be
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sticky or rigid we see a lot of
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non-price competition therefore
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competition based on branding
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advertising quality of product quality
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of service that kind of
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and also because of interdependence
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profit maximization is not necessarily
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here the sole objective of firms firms
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don't make decisions independently they
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always think about what their rivals are
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doing what their rivals are going to do
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and if you think about oligopoly as a
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dog fight a dog fight for market share
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firms are very close to having control
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over the market monopoly power in the
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market and therefore anything that they
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can do that's going to give them that
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power they are going to do if that means
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profit maximization is the best then by
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all means but if it means a different
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objective is better then they'll pursue
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that so it makes knowing the objective
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very difficult in truth we don't know
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what the objective of firms are in
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oligopoly
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therefore we say that profit max is not
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always the sole objective you think that
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this is a dogfight for market share
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whatever objective allows the firm to
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get there is what the objective a firm
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is going to be so understanding these
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characteristics can we look at any
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real-life examples yeah there are some
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really good ones let's look at global
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oligopoly examples and we can take the
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global soft drink industry absolutely a
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duopoly between coca-cola and Pepsi the
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global car industry is a good example
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OPEC is a legal oligopoly very good
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example right the Petroleum Exporting
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Countries here OPEC but we take the UK
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there are some great examples of the UK
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oligopoly the UK supermarket industry
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the UK energy industry the UK
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supermarket fuel providers a UK bus
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market UK airline market whether a short
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haul or long-haul Airlines some
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brilliant examples of oligopoly and the
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characteristics will fit here but can we
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map oligopoly behavior due to
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independence it's very difficult but one
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tool to help us is the Kingdom and curve
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model here what can we learn from this
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the king demand curve can nicely
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illustrate interdependence and can lead
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us to our conclusion of price rigidity
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in two ways the first way to use king
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demand curve is to understand that firms
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don't want to change their price let's
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understand how here so the price in the
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market is currently at p1 it is settled
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there and the theory goes that around p1
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there are differing elasticity's of
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demand we can see that above p1 there is
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a price elastic demand curve
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and we can see that below p1 there is a
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price inelastic demand curve differing
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price elasticities of demand around the
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price in the market of p1 therefore ax
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makes no sense for a firm to change
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their price let's take an example and
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say if firm raises their price from p1
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to p2 we can see here that quantity
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demanded is going to decrease
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but decrease proportionately more than
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the increase in price why is that as a
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firm moves on to the price elastic part
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of the demand curve
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that's because of interdependence other
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firms will not follow this price rise
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looking to gain market share other firms
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are going to keep that price at p1 and
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undercut this firm so the firm has
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raised their price is going to suffer
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all the other firms in the market will
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keep their price at p1 the man is gonna
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drop off significantly and as a result
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market share is gonna decrease total
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revenue is going to decrease for this
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firm what a stupid decision when
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oligopoly is all about a dogfight for
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market share so raising price above p1
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makes absolutely no sense because of
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interdependence and how other firms will
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react what about reducing price let's
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say this firm goes for a big decrease in
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price from p1 to p3 here big decrease in
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price well we can see because of the law
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of demand demand is going to increase
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from q1 to q3 but proportionately less
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than the reduction in price and that's
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clear to see here as this firm now moves
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on to the price inelastic portion of the
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demand curve why is that why is the
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proportional increase in quantity
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demanded going to be less than the fall
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in price well that's because of other
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firms and how they're going to react
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other firms are going to follow looking
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to protect their market share they're
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going to follow and get into a price war
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with this firm as a result of that total
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revenue is going to decrease
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remember if we reduce price and demand
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as price inelastic total revenue is
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going to fall and net overtime there is
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going to be no change in market share so
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even a price reduction is not in the
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best interest of the firm as they move
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on to the price inelastic portion of the
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demand curve here so it's clear from the
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very basic kingdom--and curve model that
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firms don't want to change their price
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raising price they'll lose market share
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and reducing price they won't gain
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anymore
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you've shown the long run they're going
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to lose revenue in both cases here so
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changing price altering price from p1
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makes no sense for the firm because of
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interdependence therefore there is an
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argument a price rigidity in oligopoly
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but there is another way we can use
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Kingdom and cope we can enhance him
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understand why firms don't need to
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change their price and that comes from
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drawing the marginal revenue curve the
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marginal revenue curve is going to look
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something like this remember mr is
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always twice as steep as a are so twice
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as steep there but then it's going to
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possess a vertical gap before being
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twice as steep as the second part of the
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AR curve join everything together we
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have an mr curve that looks like that
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you don't need to understand why the mr
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curve has got a vertical gap in it but
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if you want to know just click on this
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link I've explained it why there is a
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vertical gap when we draw the mr curve
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in the kingdom anchor model you can
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understand it there but that's what it
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looks like the mr curve with a vertical
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gap in it and the idea is that if costs
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change within this gap so let's say
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costs increase we're going to draw
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marginal cost
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mc1 and cost to increase to MC - the
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idea is as long as costs change within
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this vertical gap if the oligopolist is
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a profit maximize their producing where
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MC equals mr in any case they are going
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to be charging a price of p1 and
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understand that by looking at this
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diagram so if the oligopolist is a
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profit maximizer producing where MC
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equals mr in both cases MC equals mr is
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going to give us a quantity here at q1
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remembering that we read the price of
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the AR curve as long as quantities at q1
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the price is always going to be reading
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off the AR curve p1 so we can understand
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that because there is a vertical gap in
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the mr curve here as long as costs
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change within this vertical gap a profit
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maximizing oligopolist producing where
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MC equals mr will always charge a price
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of p1 IE firms don't need to change
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their price potentially if costs were to
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change within this vertical gap this is
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a very theoretical idea but you can see
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how we can extend the kingdom anchor
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model to give us a second reason behind
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price rigidity that's fantastic now
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let's understand sum up all the
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conclusions we can get from the kingdom
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anchor model conclusion number one is
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that even though it doesn't make any
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sense for a firm to do so that could
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well be price competition in an
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oligopoly market we've said that raising
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price or reducing price doesn't make
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sense but first may still try and reduce
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price in order to gain market share to
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out-compete rivals known as a price war
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so even though we said it doesn't make
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sense it doesn't mean out there in the
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real world firms don't give it a go we
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look at a supermarket providers in the
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UK is a good example you see a lot of
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price wars and price competition there
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and also short haul airlines in the UK
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competition is based around reducing
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price and price wars but the second
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conclusion which is probably more
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logical here is that we'll see a lot of
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non-price competition if we agree that
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prices tend to stay sticky and rigid at
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p1 it makes sense for there to be more
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than non-price competition like we see
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with the global soft drink industry as
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an example competition on branding
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advertising and quality absolutely but
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also we can see here that
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interdependence is annoying right
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interdependence is frustrating it means
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you can't see much price competition it
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means firms are always kind of looking
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at what their rivals are doing how their
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rivals are going to react etc and that's
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frustrating so there is a very strong
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temptation in oligopoly to break into
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the pendants and to collude together not
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have to worry about how rivals are going
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to react I'm worrying about what to do
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with your price if you're colluding you
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can act like a monopoly fix prices and
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make very high profit so there is that
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very strong temptation as well to ditch
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into dependence collude and fixed prices
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are made very high profits this is only
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half the story we need to also
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understand how we can use game theory to
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map oligopoly behavior stay tuned for
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that video next thanks for watching guys
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[Music]
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