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Managerial Economics - Oligopoly - Essay Example

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Oligopoly is a market structure in which a few sellers dominate the market and the equilibrium price determination is dependent on the level of cooperation or conflict between the sellers. Conflict versus cooperation is reflected in quoting prices. In the instant case the US market for Aspartame, a low-calorie sweetener, was largely a monopoly market with the Monsanto having the US patent till 1992, to supply this product to the market-comprised of major buyers like the Coke and the Pepsi, under the name of NutraSweet…
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Managerial Economics - Oligopoly

Download file to see previous pages... This act of Holland Sweetener amounted to an attempt to dilute the monopoly and convert the US market into an oligopoly comprised of two major suppliers of Aspartame. In order to do this the major issue presented in the case study is that of pricing. Strategic pricing in order to win the major buyers so as to capture market share and maximize profits. Given the usual assumptions of an identical product, identical costs and the Bertrand variety of oligopoly in which the both Monsanto and Holland Sweetener simultaneously decide to quote the price either as high or low to Coke and Pepsi. Due to interdependence of the two sellers it becomes very important for each firm to decide strategically whether to quote a low or a high price. In Bertrand oligopoly strategy reduces to simultaneously setting prices in the hope that the competition does not change its set price. Such conflicting or non cooperating pricing strategies are increasingly being dealt with the constructs in Game Theory which not only introduced the idea that conflict could be mathematically analyzed but also provided the terminology with which to do it. Rasmussen (2001) traces the beginning of the theoretical development in field by quoting the relevant literature and by stating that the evolution of the arguments around the "Prisoner's Dilemma" construct (as in Tucker) and thereafter Nash's papers on the definition and existence of equilibrium further developed the field of the modern non-cooperative game theory. However important and simultaneous developments were taking place in cooperative game theory through the important contributions of Nash and Shapley on bargaining games and Gillies and Shapley on the core theory utilized in study of cartels. These developments are traced in several books on economics and Game Theory. (Thus if each firm acts independently, the result is a Nash equilibrium. Part of the definition of Nash equilibrium is that each player takes what the other players are doing as given when deciding what he should do; he holds their behavior constant and adjusts his to maximize his gains. But if one firm increases its output, the other firms must adjust whether they choose to or not. If they continue to charge the same price, they will find that they are selling less; if they continue to produce the same amount, the price they can sell it for will fall. The pay-off matrix from the case study can be given as in Table 1 below:
Table 1: Pay-off Matrix of Monsanto and Holland Sweetener
In this table Monsanto is represented as Player 1 and Holland Sweetener as the player 2.As per the assumptions the payoff have been categorized in various cells of the matrix.

Player 1- Monsanto
(Figures in $ Millions)

Player 2- Holland Sweetener

An examination of the Table 1 reveals that following an independent strategy of pricing high Monsanto is likely to gain $300 million if Holland also priced high.However, its payoffs would plummet to $0 millions if ...Download file to see next pagesRead More
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