Chapter+Sixteen

= Oligopoly  =
 * = Chapter 16:  =

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 * http://www.doodledesign.com/media/portfolio/small_logos/oligopoly_logo.gif ||



**Summary**:
Oligopoly is a mix between monopoly and perfect competition. They can maximize profit by forming cartels, in this sense they become closer to the monopolistic side. When oligopolists do not work together, they will suffer. Generally firms in an oligopoly face a problem called the prisoners' dilemma which puts their self interest against the cooperation with other firms.

//oligopoly//- a market structure in which only a few sellers offer similar or identical products. //monopolistic competition//- a market structure in which many firms sell products that are similar but not identical. //collusion//- an agreement among firms in a market about quantities to produce or prices to charge. //cartel//- a group of firms acting in unison. //Nash equilibrium//- a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen. //game theory//- the study of how people behave in strategic situations. //prisoners' dilemma//- a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. //dominant strategy//- a strategy that is best for a player in a game regardless of the strategies chosen by the other players.
 * Vocabulary:**

Four Types of Market Structure.
Number of firms: - one firms: monopoly - few firms: oligopoly - many firms: - differentiated products: monopolistic competition - identical products: perfect competition

So we've studied Monopoly and Perfect Competition. Now it's time for **//Oligopoly//**. **The in-between**.

In Monopoly, one firm dominates the market. In Perfect Competition, countless firms participate in the market. In Oligopoly, **only a few firms provide the same (or nearly the same) product or service for the market.**

The funny thing about Oligopoly is that in order to maximize profits, the participants need to trust each other. Instead of just competing and competing, driving the price lower and lower, Oligopolists **work together in a //Collusion// and agree on one price, which is significantly well above the equilibrium price. In short, they are __a group of firms that try to act like a monopoly.__**

By doing so they form cartels, however, once oligopolists form cartels, they face a dilemma called the "//prisoners' dilemma//", which is a question of trust. The prisoners' dilemma is where two prisoners are given choices. The two prisoners are put in seperate rooms and are told the same thing. If they both confess, they will stay in prison for only 5 years, if one confesses and the other doesnt, the one that confesses will be set free and the one who remains silent will stay for 20 years. However on the other hand if both stay silent, they will both only spend 1 year in prison. So, if the two trust one another, the best deal would be to stay silent, however, if one of them goes for his self interest, the other will suffer greatly. But what are the risks and why is trust required?

Well one firm could breech the agreement and start selling the product or providing the service at a small margin below the agreed price. This would result in that one firm selling out and gaining massive profits as people would buy up the cheaper stuff. This would lead to a collapse of the Oligopoly as everyone in it would have to lower prices, and the failure of trust among the oligopolists would lead to a '__chicken game__'(more on this later) of competition leading to normal competitive market characteristics.

The equilibrium for an oligopoly:
 Although oligopolists would prefer form cartels to maximize profit, it is not possible to do so. Due to anti trust laws, oligopolists are prohibited from explicit agreements among themselves. Also, even if they did form a cartel, deciding on how to divide the money earned will purpose a problem. This is how the Nash equailibrium comes into play, when economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen. By doing so, the price goes to equilibrium.

The most well-known example of Oligopoly is the OPEC. OPEC stands for Organization of Petroleum Exporting Countries. The other examples of Oligopoly are cigarette, steel, and cement companies.

=**__The characteristics of Oligopoly__** = <span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;"> <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;"> <-> **Price Collusion** (The companies are not allowed to for a "Price Collusion" and agree on the price face to face.) <- Illegal <span style="font-family: 'Comic Sans MS',cursive;">
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">Very few sellers
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">Access to market is extremely difficult
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">The products are very much alike
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">Very substitutes to the products of Oligopoly (The products are almost Inelastic)
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">Price is not a factor of competition.
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">**Price Leadership** (The companies of Oligopoly **__inherently__** agree on certain price and do not lower or higher price than the set one.) <- Legal
 * <span style="color: rgb(14, 193, 11);"><span style="color: rgb(89, 255, 0);"><span style="font-family: 'Comic Sans MS',cursive;">**Product Differentiation**: The ultimate goal is to create the preference in the consumers' minds through better quality of service. Once people perceive the company's products different or more attractive, they create preference in their minds.

<span style="font-family: 'Comic Sans MS',cursive;">Media:
<span style="font-family: 'Comic Sans MS',cursive;">media type="youtube" key="k9tMYzemuDU" height="344" width="425"

media type="file" key="oligopoly.mp3"


 * Q1. If you were a seller in an Oligopoly situation, what should you do to increate the demand for your product?**

a) advertise that your product is better quality/service than other competing products. b) convince the public your products is highly elastic. c) lower the price of your product d) all of the above e) none of the above


 * Q2. Which of these companies are not in Oligopoly situation?**

a) Philip Morris Tobacco Company b) ABC c) Pepsi Co. d) U.S. Steel Company e) Target

Answer: 1) a, 2) e