Chapter+16+(JEM)+-+Oligopoly

Oligopoly Oligopoly is a market structure in which only a few sellers offer similar or identical product. Oligopoly acts like monopoly in the market. Examples of Oligopoly is oil company.



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. When the oligopolists is able to work as one company it is called Cartel.

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 greater than the competitive price (which equals marginal cost). • Possible outcome if oligopoly firms pursue their own self-interests: • Joint output is greater than the monopoly quantity but less than the competitive industry quantity. • Market prices are lower than monopoly price but greater than competitive price. Total profits are less than the monopoly profit.

• Game theory is the study of how people behave in strategic situations. • 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 provides insight into the difficulty in maintaining cooperation.