Step+16.+Oligopoly-+Lauren

=Oligopoly = 



**__Introduction__**  Oligopoly is another type of firm that's BETWEEN Monopoly and Perfect Competition.

__**What We Will Learn**__  -how many firms? -any entry barriers? -how is it different from other type of firms?

__**Key Terms**__  -oligopoly: a market structure in which only a few sellers offer similar or identical products -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 choose their best strategy given the strategies that all the others have chosen -game theory: the study of how people behave in strategic situations -prisoner's 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

 __**Topics**__ 

 1) What is oligopoly?
 -few firms that have similar or identical products -barriers to entry -between monopoly and perfect competition Oligopoly is quite simple. It's between monopoly and perfect competition that you've learned previously and when it works as a group, it goes towards monopoly while on other hand, if it competes, it works as a monopolistic competition. It's one of the two types of "imperfect competition", which includes industries in which firms have competitors but do not face so much competition that they are price takers as in perfect competition: the other is called a monopolistical competition that you'll learn in step 17.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">**2)** **Cooperation or Competition?**
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> -Oligopolies are better off cooperating and acting like a monopolist than rather to compete and become more towards a perfect competition because by acting together, they will receive a higher profit, since the price is higher. -however! This is bad for the economy in that the price is too high, quantity too low, and in that consumers get more disadvantage. -This is why anti-trust laws (like Sherman Antitrust Act of 1890) prohibit explicit agreements among oligopoly firms!

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">**3)Then why not ALWAYS cooperate?**
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> -It is better for the firms to cooperate but they rarely do because COOPERATION IS NOT THEIR SELF-INTEREST. -principles like the "invisible hand" and many other principles work due to SELF-INTEREST, cooperation does so too. -firms that care about the future profit will cooperate, but for most of the times, people COMPETE for more one time profit. -This thought is usually called the "prisoner dilemma". Let's say that two criminal in action together got caught. An police officers offers a deal to both of the criminals that if they tell on the other partner, they'll go free. Which side will you choose? -Most of the people will choose the side of telling on the other side because of THEIR SELF interest. Why not get free and let the other person go to jail? -the same idea applies here: Why cooperate when I can get more profit on my own? This is why cooperation, though more profitable, is hard. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">4) Equilibrium
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> -Nash equilibrium is when firms interacting with each other EACH choose their best strategy. -Oligopoly produces GREATER output than the output of monopoly but LESS output than the output of perfect competition -Oligopoly produces at LOWER price than monopoly price but HIGHER price than perfect competition price.<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">-Antitrust Acts sometimes prohibit even cooperation acts that could have positive effects: 1. Resale Price Maintenance: occurs when suppliers require retailers to charge a specific amount 2. Predatory Pricing: occurs when a large firm begins to cut the price of its products to drive out other firms 3. Tying: when a firm offers two or more of its products together at a single price You see how these positive effects could be blocked due to the Antitrust Acts?

__**CONCLUSION**__ So now that you've learned one type of an imperfect competition, in the next step you'll learn about how monopolistic competition is also different from a monopoly and perfect competition. Keep in mind that Oligopoly is BETWEEN monopoly and perfect competition!

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 120%;">__**QUIZ**__ <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">

Questions: 1. Oligopoly firms have more firms than a perfectly competitive market (T/F) 2. Oligopolists are better off acting like monopolists (T/F) 3. Antitrust laws discourage people to cooperate (T/F)

Answers 1. F- Less firms 2. T- but they usually don't 3. T

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 110%;"> __CITATION http://www.swcollege.com/bef/cebula/micro_f02_dialog.html__