(BTY) Chapter 16

Oligopoly


Oligopoly: a market where there are only a few sellers who offer similar or identical products. (Between monopoly and perfect competition) Firms in these industries have competitors but do not face so much competition. They are price takers.

  1. of firms : Economists who study industrial organization divide markets into four types.
Monopoly—Oligopoly—Monopolistic Competition—Perfectly Competitive Market

Monopolistic Competition: a market structure in which many firms sell products that are similar but not identical.

Markets with only a few sellers


- Because an oligopolistic market doesn't have many sellers, cooperation and self-interest plays a major role.
- The group of oligopolists is best off when they cooperate and act like a monopolist by producing a small quantity of output and charging a price above marginal cost.
- However, because each oligopolist cares about only its profit, there are strong incentives existing at work that hinder a group of firms from maintaining the monopoly outcome.
- Duopoly: Oligopoly with only two members.
- Collusion: An agreement among sellers in a market about the quantities and prices of the good.
- Cartel: A group of firms acting in unison.
external image image007.gif
Graph that shows both the characteristics of monopoly and a perfectly competitive market.
http://www.themanager.org/ME/Disney_2-Dateien/image007.gif

- Results of oligopoly: price is higher than P of competitive market, lower than P of monopoly. Quantity is higher than Q of monopoly, lower than Q of competitive market.

- Nash equilibrium: A situation in which the participants of a market choose their best strategy whatever the strategies of the others are.

The Size of Oligopoly


- An owner weighs two effects when deciding whether to produce one more unit.
- Output effect: P is above MC -> Selling one more unit will raise profit.
- Price effect: raising production will increase total Q, which lowers P and, further, profit on all the other units.

Output effect > price effect
-> More production
Output effect < price effect
-> Less production
Output effect > price effect
-> more production, more like competitive market

- The larger the number of sellers, the less concerned each seller is about its own impact on P.

Game Theory


- The study of people’s behavior depending on their situation.
- Prisoner’s dilemma: Prisoners get a different punishment depending on what they say, thus they have to be careful when they make their decision.
- Other examples: Arms races/ common resources
- Dominant strategy: The best decision one can make depending on others' decisions.
external image PD-1.gif
Prisoner's dilemma, showing what happens depending on their decision
http://ingrimayne.com/econ/IndividualGroup/PD-1.gif

Public policy toward oligopolies


- Antitrust laws discourage people to cooperate and prevent them from doing so.

Controversies over Antitrust policy

- Resale price maintenance: if they have market power, they would change whole sale P, not retail P
- Legitimate goal: Ex) some retail shops offer less service, but lower P. To keep consistent service, the regulation of price is necessary.
- Predatory pricing: sell products at really low price until competitors get out of the market. However, too much loss can damage the predator, not the prey.
- Tying: does not matter because buyers would pace zero P on worthless attachment. Or it may be used for price discrimination.

Questions
1. Oligopoly has as much sellers as a perfectly competitive market (T/F)
2. Oligopolists can't act like monopolists (T/F)
3. Antitrust laws discourage people to cooperate (T/F)

Answers
1. F- Small number of sellers
2. F- They can
3. T