Chapter+16+Oligopoly

Ch.16 Oligopoly


=**Table of Contents** = = = 1. Introduction 2. Key Topics and Lectures 3. Conclusion 4. Glossary 5. Summary 6. Mini Quiz 7. Answer Key 8. Citations

- Yena S.

 **__Introduction__**

In the previous chapters, we have discussed two types of market structures: competition and monopoly. Competition occurs when there are many firms in a market offering essentially identical products; monopoly occurs when there is only one firm in a market. Yet, some industries fall somewhere between there two structures; they have competitors, but at the same time, do not face so much competition that they are price takers. We call this form of market an oligopoly.

**__Monopoly and Perfect Competition__**

**__Duopoly__**
 * Oligopoly** is a market with only a few sellers offering similar or identical products.
 * Monopolistic competition** is a market in which many firms sell differentiated products.

Imagine that there is an oligopoly with only two parties, which are called a **duopoly**. These duopolists would want to get together and produce goods and products together. Here, the action of having an agreement on how much to produce for certain prices is called the collusion.

**__Competition, Monopolies, and Cartels__**

The group formed in unison by such action is called cartel. So when oligopolists form cartels, they would try to maximize their joint profit. They will try to change prices and quantities that will be best for themselves and for the other party as well. Thus, oligopolists will decide at the equilibrium point where both parties will have no incentives to make different decisions. Such situation where each choose their best strategy that benefits both parties is called the Nash Equilibrium.

**__How the Size of an Oligopoly Affects the Market Outcome__**

So now, let's examine how the size of an oligopoly affects the market outcome.  We can use the analysis of duopoly to discuss how the size of an oligopoly is likely to affect the outcome in a market. If the sellers could form a cartel, they would try to maximize total profit by acting like monopoly. However, as the number of sellers increase (cartel grows larger), the outcome becomes less likely. If the oligopolists do not form a cartel because of the antitrust laws that would prevent it, they look at two effects: If the output effect is larger than the price effect, the seller of the product will increase the production until the two marginal effects exactly balance. So, the larger the number of sellers, the price effect will fall. If the oligopoly grows very large, the price effect might even disappear! This is why the oligopolistic market would look more and more like a competitive market as the size grows.
 * The output effect: the price is above marginal cost, so selling their product at the price will leave them profit.
 * The price effect: raising production will increase the total amount sold, which will lower the price of water and lower the profit on all the other products sold.

**__Game Theory and the Economics of Cooperation

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 * Game theory**: the study of how people behave in strategic situations, in which each person must consider how others might respond to that action
 * Prisoner's Dilemma**: shows difficulty of maintaining cooperation, even when it would make both happy

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 * Dominant strategy**: the best strategy for a player to follow regardless of other players' strategies

Lack of cooperation among the oligopolists is desirable from the standpoint of society as a whole. Government policy that discourages cooperation is common law. Policy makers regulate the behavior of oligopolists through the antitrust laws.

** 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. Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.
 * Why people sometimes cooperate **

__**Conclusion/Summary**__

Oligopolies would like to act like monopolies, but self-interest drives them closer to competition. The story of the prisoner's dilemma shows why oligopolies can fail to maintain cooperation, even when cooperation is in their best interest. Policymakers need to be careful when they use the substantial powers of the antitrust laws to place limits on firm behavior.

__Glossary__

 * Oligopoly** is a market with only a few sellers offering similar or identical products.
 * Monopolistic competition** is a market in which many firms sell differentiated products.
 * Game theory**: the study of how people behave in strategic situations, in which each person must consider how others might respond to that action
 * Prisoner's Dilemma**: shows difficulty of maintaining cooperation, even when it would make both happy
 * Dominant strategy**: the best strategy for a player to follow regardless of other players' strategies

__**Mini Quiz**__

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- 3. T

__**Citation**__

http://www.youtube.com/watch?gl=KR&hl=ko&v=srgdg5tgPJk http://www.youtube.com/watch?v=Eb7xkST7HL4&feature=player_embedded http://images.google.com/imgres?imgurl=http://dmcdaniel.files.wordpress.com/2009/01/monopoly.jpg&imgrefurl=http://dmcdaniel.wordpress.com/2009/01/04/real-estate-and-the-growing-church/&usg=__UkmliGEKagpWM88UhhRRMKBbXpE=&h=1114&w=1169&sz=452&hl=en&start=7&um=1&tbnid=CTMy-dOlZPeNmM:&tbnh=143&tbnw=150&prev=/images%3Fq%3Dmonopoly%26hl%3Den%26client%3Dfirefox-a%26rls%3Dorg.mozilla:en-US:official%26sa%3DN%26um%3D1