CHAPTER+16-SSJJ

O L I G O P O L Y Between monopoly and perfect competition   Firms in oligopoly have competitors but, at the same time, do not face so much competition that they are price takers. Economists call this situation //imperfect competition. // - Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. - Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers. • Types of **imperfectly competitive markets** – __ Oligopoly __ • only a few sellers, each offering a similar or identical product to the others – __ Monopolistic competition __ • many firms selling products that are similar but not identical ** The four types of market structure ** ** Markets with only a few sellers ** Because of the few sellers, the key feature of oligopoly is the tension __between cooperation and self-interest.__ ** Markets with only a few sellers ** • 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. ** A duopoly example ** __ A duopoly is an oligopoly with only two members __. It is the simplest type of oligopoly. ** The demand schedule for water ** • Price and quantity supplied – The price of water in a perfectly competitive market would be driven to where the marginal cost is zero: • Q = 120 Liters – The price and quantity in a monopoly market would be where total profit is maximized: • P = $60 • Q = 60 Liters • Price and quantity supplied – The socially efficient quantity of water is 120 liters, but a monopolist would produce only 60 liters of water. – So what outcome then could be expected from duopolists? ** Competition, monopolies, and cartels ** • The duopolists may agree on a monopoly outcome. – **Collusion ** is an agreement among firms in a market about quantities to produce or prices to charge. – **Cartel ** is a group of firms acting in unison. ** The equilibrium for an oligopoly ** • A **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. • When firms in an oligopoly individually choose production to **maximize profit**, they produce __quantity of output greater than the level produced by monopoly and less than the level produced by competition.__ • The oligopoly price is less than the monopoly price but fgreater than the competitive price (which equals marginal cost). • Possible outcome if oligopoly firms pursue their own self-interests: • **<span style="color: rgb(51,153,102); font-family: Arial;">Joint output ** is greater than the monopoly quantity but less than the competitive industry quantity. • **<span style="color: rgb(51,153,102); font-family: Arial;">Market prices ** are lower than monopoly price but greater than competitive price. • **<span style="color: rgb(51,153,102); font-family: Arial;">Total profits ** are less than the monopoly profit. ** How the size of an oligopoly affects the market outcome ** • How increasing the number of sellers affects the price and quantity: – **<span style="color: rgb(51,153,102); font-family: Arial;">The output effect ** : because price is above marginal cost, selling more at the going price raises profits. – **<span style="color: rgb(51,153,102); font-family: Arial;">The price effect: ** raising production will increase the amount sold, which will lower the price and the profit per unit on all units sold. • __ As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. __  • The price approaches marginal cost, and the quantity produced approaches the socially efficient level. ** Game theory and the economics of cooperation ** • **<span style="color: rgb(51,153,102); font-family: Arial;">Game theory ** is the __study of how people behave in strategic situations__. • **<span style="color: rgb(51,153,102); font-family: Arial;">Strategic decisions ** are those in which each person, in deciding what actions to take, must consider how others might respond to that action. • Because the number of firms in an __oligopolistic market is small__, each firm must act strategically. • Each firm knows that its profit depends not only on how much it produces, but also on how much the other firms produce. ** The prisoners’ dilemma ** • <span style="color: rgb(51,153,102); font-family: Arial;">The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation. • Often people (of firms) fail to cooperate with one another even when cooperation would make them all better off. • The prisoners’ dilemma is a particular **'game'** between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. • The **<span style="color: rgb(51,153,102);">dominant strategy ** is the best strategy for a player to follow regardless of the strategies chosen by the other players. • __ Cooperation is difficult to maintain __, because cooperation is not in the best interest of the individual player. ** 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. ** Examples ** <span style="color: rgb(51,153,102); font-family: Arial;">An arms-race game <span style="color: rgb(51,153,102); font-family: Arial;">An advertising game <span style="color: rgb(51,153,102); font-family: Arial;">A common-resource game ** Why people sometimes cooperate ** • Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain. ** Summary ** • Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. • Yet if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. • The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. • The logic of the prisoners’ dilemma applies in many situations, including oligopolies. media type="youtube" key="Eb7xkST7HL4" height="344" width="425"