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Oligopoly

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Title: Oligopoly


1
Oligopoly
  • Alexa Hartmayer

2
Key Concepts
  • A market Situation in which there are very few
    sellers. Each seller knows that the other sellers
    will react to its changes in prices and
    quantities.
  • - Economics Today (pg 619)

3
Characteristics
  • Small Number of Firms
  • Homogeneous or Differentiated products
  • Homogeneous Cement, Zinc, Copper
  • Differentiated Automobiles, Greeting Cards
  • Interdependent Every individual firm must
    consider the actions of other firms
  • Strategic Dependence When one firm counters
    anothers price, quality, advertising, to ensure
    the firms welfare

4
Causes of Oligopolies (1)
  • Economies of Scale
  • Firms total cost curve will slope downward as
    more outputs are produced. Average total cost
    will be reduced as firms expand the scale of
    their operation.
  • Smaller firms will have a tendency to be
    inefficient (ATC greater than large firms). They
    are either absorbed or go out of business.

5
Causes of Oligopolies (2)
  • Barriers to Entry Difficult to Enter
  • Legal Barriers (patents)
  • Control over Resources
  • Cartels (OPEC)
  • Collusion (illegal in United States)

6
Causes of Oligopolies (3)
  • Mergers Joining of two or more firms under
    single ownership and control
  • Horizontal Merger Joining of firms that are
    producing or selling a similar product
  • Vertical Merger Joining of a firm with another
    to which it sells an output or from which it buys
    an input

7
Game Theory
  • Analytical framework in which two or more
    individuals, companies, or nation compete for
    certain payoffs that depend on the strategy that
    others employ
  • Low Price/High PriceWinner and Loser
  • Low Price/Low PriceWinner and Winner
  • High Price/High PriceBig Winner and Big Winner
  • Collusion (illegal in US)
  • Nash Equilibrium When the strategies of all the
    player are optimum (self enforcing)

8
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9
Kinked Demand Curve
  • Price inflexibility
  • Above P1 is relatively elastic
  • Below P1 is relatively inelastic
  • MCMR is profit maximization

10
Losses Profits
11
Breaking Even
12
Comparing Market Structures
  • Refer to page 633 in textbook

13
Oligopoly Question (1)
  • (E)- The strategy for Bright is fully dependant
    on Sparkles strategy, and Sparkles dominant
    strategy is strategy 1

14
(2)
  • Produces the Best results for every possible
    action the other participants take
  • Firms will try to maximize their profits by
    picking their dominant strategy, or by watching
    the other firms dominant strategy

15
(3)
  • Interdependence in an industry.
  • Game theory is a way of describing the various
    outcomes in any situation involving two or more
    competing firms.

16
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17
Answers to Free Response
  1. Mutual Interdependence, the behavior of one firm
    affects the other.
  2. Evening Departure would be the best strategy.
  3. Morning Departure is dominant for Windward.
  4. Choosing an evening strategy is not dominant.
    Airtouch does not have a dominant strategy
    because its best payoff depends on Windwards
    strategy.
  5. 700 will be Windwards daily profit.

18
Ode to the Oligopoly
  • They rise from ashes of enemies past
  • the truest gluttons any shall see.
  • Consuming the horizon, the zenith
  • of humanities sullen world.
  • Asking in voices of sinister mirth
  • Shall we play a game?
  • Failing to follow in suite will lead to loss
  • Yet complying without a care
  • Will cause lady of law to weigh her scales
  • Laying your avarice bare to blinded eyes

19
Real World Links
  • http//www.torontosun.com/money/2011/01/19/1695122
    6.html
  • http//www.dofonline.co.uk/content/view/5080/152/
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