Chaoter16+JDEM

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= = = = = = =**Chapter Introduction:**=

==== //From the last couple of chapters we saw the breakdown of markets with multiple firms and markets with one monopoly firm. Here we move on to the different types on imperfect competition and look at the first type called the oligopoly. An oligopoly is a market structure in which only a few sellers offer the same or similar products. One example could be water bottle or soda companies.// ====

=**Types of** imperfect competition=

It's the first type of imperfect competition as stated. Economists use the term called a "concentration ratio" to measure a market's domination by a small number of firms. A concentration ratio is a statistic or percentage of total output in the market supplied by the four largest firms. Under an oligopoly, there is the simplest and smallest type, which is called a duopoly. A duopoly is an oligopoly with only two members.
 * An Oligopoly:**

This is the second type of imperfect competition. Monopolistic Competition is a market structure where many firms sell products that are not the same, but similar. Some examples for these include the CD, book, and video game industry. Here, each firm has a monopoly over what it produces, but other firms like them also have monopolies over what they make. So they all compete for the same customers. Let's say they are having problems coming up with a solution to their production and price disagreements. An agreement among firms can be reached if they come up with a collusion. A collusion is an agreement among firms in a market about quantities to produce or prices to charge. The group of firms acting together in unison is called a cartel.
 * Monopolistic Competition:**

=**How the size of an Oligopoly affects the market outcome**=

A large oligopoly is basically a large group of competitive firms. A competitive firms thinks about the output effect when deciding how much to produce. As the number of sellers in an oligopoly gets bigger, an oligopolistic market looks more like a competitive market each time. The price draws nearer the marginal cost, quantity produced goes closer to the social efficient level. Letting free trade happen will make the number of producers go up from which each consumer can choose. The increased competition will keep prices closer to the marginal cost.

=**Game Theory, Cooperation between People, and the Prisoners' Dilemma**= = =

Game theory is the study of how people behave and react in strategic situations. Basically meaning that there is a situation and people must decide what they want to do because of the situation, and how people will respond to that is also important. Game theory is also another way to understand the behavior of oligopolies.

One game that they play is called "the prisoners' dilemma", which is a game between two captured prisoners that shows why cooperation is hard to keep up even when it's mutually beneficial. It's hard for people to cooperate which each other sometimes, even when they know they both can be better off. See the chart below:



The outcome with Bonnie and Clyde was that they ended up spending 8 yrs. in prison. They could have avoided 7 extra years in prison if they both had remain silent, but they didn't because the followed through with their own dominant strategies. A dominant strategy is the best strategy for a player in a game, where it doesn't matter what the other players' strategies are. So Bonnie and Clyde did what was best for them in their own self interest, not even considering what the other person is going to do. As a result they ended up in prison, at least //together// on this one, and will be there for the next 8 years.

=**Oligopolies and the Prisoners' Dilemma: How they Relate**=

Oligopolists have trouble with keeping monopoly profits. Monopoly outcomes are jointly rational for the oligopoly, but the oligopolists have incentives to cheat. It's ust like using dominant strategies, where the oligopolists have incentives to cheat and they don't care about what the others' strategies are, as long as they benefit. Self-interests motivate the prisoners in the prisoner' dilemma, self-interest motivates oligopolists. Also, self-interest makes it harder for the oligopoly to maintain cooperative outcome with low production, high prices, and monopoly benefits.

=**Other "Games" of the Prisoners' Dilemma**=

This is a game between two countries, where the safety and power of each country depends on both its decision whether to arm and the decision made by the other country.
 * An Arms-Race Game:**

This game is between firms that both pump oil from a common pool. The profit each earns depends on both the number of wells it drills and the number of wells is drilled by the other firm.
 * A Common-Resources Game:**

=**What?! It's Possible for People to Cooperate?!**=

Yes, even if it seems that cooperation is hard to reach in the prisoners' dilemma, cooperation can still be achieved. Not all people are driven by their own self-interest to only look out for themselves. Prisoner in prison for example don't always turn in their partners. Cartels occasionally are able to keep a collusive arrangements they set up, even though they may se an incentive to turn on other members. One way people have been able to counter the prisoners' dilemma is having played the game more than once. It's like a "been there, done that" type of situation.

=**Chapter Conclusion:**=

An oligopoly is basically a monopoly "wannabe" where they want to be monopolies, but can't because self-interest gets in the way and creates competition. Based on their actions, oligopolies end up either looking like a monopoly or a competitive market, which depends on how many firms they have and how cooperative the firms are with each other. To understand the minds of oligopolies even more, it's important to understand game theory and the prisoners' dilemma. Under the prisoners' dilemma oligopolies do not cooperate well, but if they did, it would be to their benefit.

Policy makers use antitrust laws to prevent oligopolies from doing things that lower competition. When these laws are applied it can become controversial because some actions that look like they might lower competition will actually be beneficial to businesses.

1. An oligopoly is a market in which a. there are only a few sellers, each offering a product similar or identical to the others. b. firms are price takers. c. the actions of one seller in the market have no impact on the other sellers’ profits. d. All of the above are correct.

2. There are two types of imperfectly competitive markets: a. monopoly and monopolistic competition. b. monopoly and oligopoly. c. monopolistic competition and oligopoly. d. monopolistic competition and cartels.

3. What is another "Game" like the Prisoner's Dilemma? a. Scare-Resources Game b. An Arms-Race Game c. Alliance Game d. Excludable- Resource Game

4. In what type of market do the actions of any one seller have a significant impact on the profits of all other sellers? a. a monopoly b. perfect competition c. monopolistic competition d. an oligopoly

69. An oligopolist will increase production if the output effect is a. less than the price effect. b. equal to the price effect. c. greater than the price effect. d. greater than or equal to the price effect.

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=**Glossary:**=

Oligopoly- a market structure in which only a few sellers offer the same or similar products. One example could be water bottle or soda companies. Monopolistic Competition- a market structure where many firms sell products that are not the same, but similar. Some examples for these include the CD, book, and video game industry. Duopoly- an oligopoly with only two members. They are the simplest and smallest type. Game theory- the study of how people behave and react in strategic situations. The Prisoners' Dilemma- a game between two captured prisoners that shows why cooperation is hard to keep up even when it's mutually beneficial. Dominant strategy- the best strategy for a player in a game, where it doesn't matter what the other players' strategies are. Collusion- an agreement among firms in a market about quantities to produce or prices to charge. Cartel- the group of firms acting together in unison. = =

Citation:

Mankiw, Gregory N. __Principles of Microeconomics__. USA. South Western, 2007.