Oligopoly theories
After Chamberlin’s 1929 model of “mutual dependence recognized”, after Heinrich von Stackelberg’s 1934 duopoly model, after Paul M. Sweezy’s 1939 “kinked-demand curve” theory, and after the influential book Competition Among the Few (1949) by William Fellner, a ground-breaking approach to oligopoly theory emerged between 1956 and 1958 from Bain, Paolo Sylos-Labini, and Franco Modigliani.
Sylos-Labini had denounced the lack of a rigorous theory of oligopoly; he claimed that the monopolistic nature of giant firms had always been regarded as a problem by the economists of the past, but that the imperfect competition revolution had shifted the focus towards the market power of very small firms, distracting theoretical research from the question of monopoly power in concentrated industries. With its “limit pricing” model, the new approach assumed that a monopolist, or a number of oligopolists, can set a price sufficiently low to deter the entry of new firms. Here not only actual, but also potential competition affects a firm’s conduct, which in turn determines market structure. In this model we find a formalization of the old idea that the threat by potential competitors disciplines the incumbent’s behaviour.Another important contribution to the theory of oligopoly came from Stigler (in 1964), the most influential economist of the new Chicago school, who attributed a crucial role to information in oligopolistic markets: he emphasized that when information about firms’ behaviour is lacking, collusion cannot be effective, because it is difficult to detect “secret price-cutting”. Stigler’s article greatly contributed to the change in the antitrust attitude, especially in the merger area. Before Stigler, in 1950 Tibor Scitovsky had already stressed the importance of asymmetric information as a source of market power; but it was after Stigler that information started to play a pivotal role, which is still central today in the new IO.
The 1950s and 1960s were also very important for the development of game theory, a branch of mathematics used to model strategic behaviour. Its earliest applications to economics were made in the 1940s by John von Neumann and Oskar Morgenstern, and then by John Nash in 1950 who introduced his famous notion of equilibrium, but as we shall see, it was only after its extensions and refinements by Reinhard Selten (in 1965) and John C. Harsanyi (in 1967-68) that John F. Nash’s concept of equilibrium was definitely adopted by industrial economists (Giocoli 2009).