Chapter+16+Oligopoly.JAKS

=Chapter 16. = =Oligopoly =



**Definitions **

 * **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 of the strategies chosen by the other players

**Learning Objectives **

 * Grasp the concept of an imperfect competition
 * Go in detail with a particular type of an imperfect competition: oligopoly
 * Ways oligopoly work.
 * Impact of oligopoly
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">How the public reacts toward oligopolies

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<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">I. Introduction
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Imperfect competition**: A market situation in between a monopoly and a competitive market. There are more than two but not many firms in the market, they do not have enough competition, they are price takers. Oligopoly is a type of an imperfect competition. ANYWAYS, the main concept her is that an Oligopolistic market __only has a few sellers.__

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<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Before we get into Oligopoly, let’s just review the two extremes: monopoly and perfect competition. <span style="background-color: #ffffff; color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Types of Imperfect Competition <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> In conclusion, we have 4 types of market structure...
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> __A perfectly competitive market:__ price is always equal to the marginal cost of production. in the long run: entry and exit drive economic profit to zero so the price also equals average total cost.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> __Monopoly__: prices are above marginal cost. This leads to a positive economic profit for the firm but a deadweight loss for the society.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Oligopoly**: a market structure in which only a few sellers offer similar or identical products
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">__Concentration ratio__: a statistic used by economists that measure a market’s domination by a small number of firms.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Normal industries: four-firm concentration ratio under 50
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Highly concentrated industries: above 50
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Monopolistic Competition**: a market structure in which many firms sell products that are similar but not identical
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Examples: novels, movies, CDs, computer games.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers.

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<span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> cooperation vs. self-interest <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> =It is better to cooperate! __Duopoly__: an oligopoly with 2 members. <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Equilibrium for an Oligopoly <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Peace is not always the case. Anti trust laws tend to prevent collusion between firms and disagreement among firms make collusion hard. As I mentioned above, it is __better to cooperate.__ <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> In conclusion When firms in an oligopoly individually choose production to maximize profit, they produce a 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.//__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Collusion**: n agreement among firms in a market about quantities to produce or prices to charge
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> **Cartel**: a group of firms acting in unison
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> If oligopolists individually pursue their own self-interest when deciding how much to produce, they produce a //__total quantity greater than the monopoly quantity, charge a price lower than the monopoly price and earn a smaller amount of profit__//__.__ = Nash Equilibrium.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**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

Importance of Size When firms decide how much to produce: they take in to consideration two effects <span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> In conclusion
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The output effect: when price is above marginal cost, producing more will raise profit.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The price effect: raising production decreases price and lowers profit.
 * __//<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The larger the number of sellers, each firms is has smaller power in the market. //__
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> As the number of sellers grow, an oligopolistic market becomes similar to a competitive market.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The price approached marginal cost and the quantity produces approaches the socially efficient level.

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<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Game Theory**: the study of how people behave in strategic situations <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">**Prisoners’ Dilemma**: a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">not necessary in understanding competitive markets and monopolistic markets
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">used to describe a game when......
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">there are rules that govern actions,
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">two or more players,
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">choices of action where strategy matters,
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">the game has one or more outcomes,
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">the outcome depends on the strategies chosen by all players.

Oligopolies have trouble maintaining monopoly profits. //__Oligopolists have an incentive to cheat__//. Again, self-interest makes it difficult for the oligopoly to maintain the cooperative outcome. >> <span style="color: #ad0000; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> What is better for society? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> V. Public Policy Toward Oligopolies Restraint of Trade and the Antitrust Laws. Government can discourage oligopolies through the common law- using contracts. <span style="color: #0085ad; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Controversies over Antitrust laws <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * Dominant Strategy**: a strategy that is best for a player in a game regardless of of the strategies chosen by the other players
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Examples of the Prisoner’s Dilemma
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Arms races =
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Common Resources =
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">[[image:16-5.jpg]]
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Although the monopoly outcome is good for the firms, it is bad for the consumers of the product, having to pay a higher price for it.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">When oligopolists fail to work together and become a cooperative monopoly, the firms produce a quantity close to that of an optimal level, becoming similar to a firm in a competitive market.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Two examples of antitrust laws:
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The Sherman act
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">The Clayton act.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Resale Price Maintenance: business practices that appear to reduce competition may have purpose.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Predatory Pricing:a recapture of a firm’s monopoly, and raising the price again.
 * <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Tying: Forcing a firm to accept a worthless product as part of a deal.

<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">VI. Conclusion
<span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;"> Characteristics of an Oligopoly (Barron's 07-08 2nd edition) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Formidable barriers to entry
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Differentiated or similar product
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Interdependence
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Few firms, controlling major shares of market
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Allocatively inefficient: price > marginal cost, excess profits
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Price > marginal revenue indicating pricing strategy and non-price competition
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Price-makers
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">Collusive activities and cooperative arrangements
 * <span style="display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: left;">The dominant type of market structure in US industry

<span style="border-collapse: separate; color: #ff0600; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 13px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 20px; orphans: 2; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;">A little bit more of Game Theory!! Ready Set Go!!

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=<span style="color: #00ff00; display: block; font-family: Impact,Charcoal,sans-serif; font-size: 270%; text-align: center;">Thank You =

=<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; font-size: 17px; text-align: center;">Review Questions = <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following is a characteristic of a monopolistic competition? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following is //not// a characteristic of oligopoly? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following is a characteristic of monopolistic competition? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Which of the following illustrates the demand curve facing an oligopolist when rival firms follow a price decrease but //not// a price increase? <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;"> Answers 16.JAKS
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P > MC
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Efficiency
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Mostly price competition
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P = MR
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Homogeneous or similar products
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P = MC
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Price-maker
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Strong barriers to entry
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Few firms
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">P > MR
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Economically efficient in the long run
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Pricing at minimum ATC in long run
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Excess capacity
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Very few competitors
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Most dominant market structure in United States
 * 1) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Perfectly horizontal demand curve
 * 2) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Highly inelastic demand curve
 * 3) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Highly elastic demand curve
 * 4) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A demand curve that is tangent to the average total cost curve
 * 5) <span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">A demand curve consisting of two discontinuous segments

<span style="background-color: #811a9e; color: #ffffff; display: block; font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif; text-align: center;">Works Cited
<span style="font-family: 'Palatino Linotype','Book Antiqua',Palatino,serif;">Images: [] Images: [|http://www.math.cornell.edu/~mec/2008-2009/Anema/gametheory.gif] Images: [|http://www.gypsyeyestokyo.com/Artist~Dolk~Sold%20Out.html] Video: [] Review Questions: Barons AP Micro/Macro Economics 2007-2008 2nd Edition