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OLIGOPOLY

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Title: OLIGOPOLY


1
OLIGOPOLY
  • Chapter 16

2
The Spectrum of Market Structures
3
The Spectrum of Market Structures
4
Imperfect Competition
  • Market structures that fall between perfect
    competition and pure monopoly.

5
Imperfect Competition
  • Industries in which firms have competitors but do
    not face so much competition that they are price
    takers.

6
Types of Imperfectly Competitive Markets
  • Oligopoly
  • ä Only a few sellers, each offering a similar
    or identical product to the others.
  • Monopolistic Competition
  • ä Many firms selling products that are similar
    but not identical.

7
Oligopoly Markets With Only a Few Sellers
  • Because of the few sellers, the actions of any
    one seller in the market can have a large impact
    on the profits of all the other sellers.

8
Characteristics of an Oligopoly Market
  • Few sellers offering similar or identical
    products
  • Interdependent firms
  • Best off cooperating and acting like a monopolist
    by producing a small quantity of output and
    charging a price above marginal cost

9
Duopoly Example
  • A duopoly is an oligopoly with only two members.
    It is the simplest type of oligopoly.

10
Duopoly Example Demand Schedule for Water
11
Duopoly Example Price andQuantity Supplied
  • The price and quantity of water in a perfectly
    competitive market would be
  • P MC 0
  • Q 120 gallons
  • The price and quantity in a monopoly market would
    be
  • P 60
  • Q 60 gallons

12
Duopoly Example Price andQuantity Supplied
  • The socially efficient quantity of water is 120
    gallons, but a monopolist would produce only 60
    gallons of water.
  • So what outcome then could be expected from
    duopolists?

13
Outcome from Duopoly Example
  • The duopolists may agree on a monopoly outcome.
  • ä Collusion
  • â The two firms may agree on the quantity to
    produce and the price to charge.
  • ä Cartel
  • â The two firms may join together and act in
    unison.

14
Nash Equilibrium
  • Nash equilibrium is a situation in which economic
    actors interacting with one another each choose
    their best strategy given the strategies that all
    the others have chosen.

15
Nash Equilibrium
  • Nash Equilibrium
  • n/(n 1)
  • â where n is the number of firms in the
    industry.
  • If n 2, then the joint output would be 2/3 of
    the competitive market.
  • Qjoint 2/3(120 gallons) 80 gallons
  • Qeach firm 80/2 40 gallons

16
Equilibrium for an Oligopoly
  • Possible outcome if oligopoly firms pursue their
    own self-interests
  • ä Joint output is greater than the monopoly
    quantity but less than the competitive
    industry quantity.
  • ä Market prices are lower than monopoly price
    but greater than competitive price.
  • ä Total profits are less than the monopoly
    profit.

17
Size of an Oligopoly and Market Outcome
  • How increasing the number of sellers affects the
    price and quantity
  • ä The output effect Because price is above
    marginal cost, selling more at the going price
    raises profits.
  • ä The price effect Raising production lowers
    the price and the profit per unit on all units
    sold.

18
Size of an Oligopoly and Market Outcome
  • As the number of sellers in an oligopoly grows
    larger . . .
  • . . . the market looks more and more like a
    competitive market.
  • . . . the price approaches marginal cost.
  • . . . the quantity produced approaches the
    socially efficient level.

19
Quick Quiz!
  • If the members of an oligopoly could agree on a
    total quantity to produce, what quantity would
    they choose?

20
Quick Quiz!
  • If oligopolies do not act together, do they
    produce a total quantity more or less than in the
    previous question?

21
Game Theory and the Economics of Cooperation
  • Game theory is the study of how people behave in
    strategic situations.

22
Game Theory and the Economics of Cooperation
  • Strategic decisions are those in which each
    person (firm) in deciding what actions to take,
    must consider how others (firms) might respond to
    that action.

23
Game Theory and the Economics of Cooperation
  • Because the number of firms in an oligopolistic
    market is small, each firm must act
    strategically.

24
Game Theory and the Prisoners Dilemma
  • The prisoners dilemma illustrates the difficulty
    in maintaining cooperation.
  • ä Often people (firms) fail to cooperate with
    one another even when cooperation would make
    them better off.

25
The Prisoners Dilemma
26
The Prisoners Dilemma
  • The dominant strategy is the best strategy for a
    player to follow regardless of the strategies
    pursued by other players.

27
The Prisoners Dilemma
  • Cooperation is difficult to maintain, because
    cooperation is not in the best interest of the
    individual player.

28
Oligopolies as a Prisoners Dilemma
  • Self-interest makes it difficult for the
    oligopoly to maintain a cooperative outcome with
    low production, high prices, and monopoly profits.

29
Oligopolies as a Prisoners Dilemma
  • The monopoly outcome is jointly rational for the
    oligopoly, but each oligopolist has an incentive
    to cheat.

30
An Oligopoly Examples of the Prisoners Dilemma
31
An Oligopoly Example of the Prisoners Dilemma
Iraqs Decision
40 billion for each
Iraq gets 30 billion Iran gets 60 billion
High Production
Irans Decision
Iraq gets 60 billion Iran gets 30 billion
50 billion for Each
Low Production
32
Other Examples of the Prisoners Dilemma
U.S. Decision
Arm
Disarm
U.S. at risk and weak USSR safe and powerful
Both countries at risk
Arm
USSRs Decision
U.S. safe and powerful USSR at risk and weak
Both countries safe
Disarm
33
Other Examples of the Prisoners Dilemma
Marlboros Decision
Advertise
Dont Advertise
Marlboro gets 2 billion profit Camel gets 5
billion profit
3 billion profit for each
Arm
USSRs Decision
Marlboro gets 5 billion profit Camel gets 2
billion profit
4 billion profit for each
Disarm
34
Why People Sometimes Cooperate
  • Firms in oligopolies have a strong incentive to
    collude in order to reduce production, raise
    prices, and increase profits.
  • Firms that care about future profits will
    cooperate in repeated games rather than cheating
    in a single game to achieve a one-time gain.

35
Public Policy Toward Oligopolies
  • Cooperation among oligopolists is undesirable.
  • ä It leads to production that is too low.
  • ä It leads to prices that are too high.

36
Antitrust Laws
  • Antitrust laws make it illegal to restrain trade
    or attempt to monopolize a market.
  • ä Sherman Antitrust Act of 1890
  • ä Clayton Act of 1914

37
Controversies over Antitrust Policy
  • Antitrust policies sometimes may not allow
    business practices that have potentially positive
    effects
  • ä Resale price maintenance
  • ä Tying

38
Quick Quiz!
  • What kind of agreement is illegal for businesses
    to make?
  • Why are the antitrust laws controversial?

39
Conclusion
  • An oligopoly may end up looking more like a
    monopoly or a competitive market, depending on
    the number of firms.

40
Conclusion
  • Oligopolies can attempt to cooperate with each
    other but are limited by laws.

41
Conclusion
  • Antitrust laws are used to regulate the behavior
    of oligopolies.

42
OLIGOPOLY
  • End of Chapter 16

43
(No Transcript)
44
Number of Firms?
Many
firms
Type of Products?
Identical
Differentiated
One
Few
products
products
firm
firms
Monopolistic
Perfect
Monopoly
Competition
Oligopoly
Competition
(Chapter 15)
(Chapter 17)
(Chapter 16)
(Chapter 14)
Tap water
Novels
Wheat
Tennis balls
Cable TV
Movies
Milk
Crude oil
Figure 16-1
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