Chapter+16+-+Oligopoly+CDJ

__OLIG OPOLY __

Between Monopoly and Perfect Competition LET'S EXAMINE THE **DIFFERENCES** BETWEEN THE  http://www.flickr.com/photos/david_saia/129221101/

OLIGOPOLY & MONOPOLISTIC COMPETITION ** !
 * MON ****OPOLY & PERFECT COMP ****ETITION &

But before we actually go deeper about the "oligopoly", watch the video below media type="youtube" key="Eb7xkST7HL4" height="344" width="425"
 * FIRST**, then get an basic idea of what the **OLIGOPOLY** is !

Now that we get the basic structure of oligopoly, let's go back and answer the question of the differences between
 * OLIGOPOLY & PERFECT COMPETITION **

Like mentioned in the video above, **oligopoly** has characteristics consist of ....
 * Few sellers
 * Sell similar or identical products
 * Example: Cigarettes, soft drinks

source: http://www.themanager.org/ME/Disney_2.htm

However, **perfect competition** has characteristics of ...
 * Many firms
 * Identical products
 * Price takers

However, this does not mean there are only two markets that exist. There are also **MONOPOLY** (from the previous chapter) and **MONOPOLISTIC COMPETITION** (that will be talked about in the later chapter)

**Monopoly** has ....
 * One firm
 * Price makers
 * Example: Tap water

Monopolistic competition has...
 * Many firms
 * Sell similar but not identical products
 * Example: novels

Because we have learned monopoly and perfect competition from previous chapters, let's put the definition of oligopoly and monopolistic competition together.

**'Oligopoly is a market that has few sellers, which sells similar or identical products. However, monopolistic competition is a market that has many firms but sell differentiated products.'**

<span style="font-size: 140%; color: rgb(169, 25, 25);">Competition, Monopolies, and Cartels Imagine that there's an oligopoly with only two parties, which are called a duopoly. These <span style="font-size: 130%; color: rgb(0, 255, 127);">**duopolists** would want to get together and produce goods and products together. Here, the action of having an <span style="font-size: 120%; color: rgb(57, 134, 45);">**agreement on how much to produce for certain prices** is called the collusion. Adding on to such information, the group formed in unison by such action is called <span style="font-size: 130%; color: rgb(235, 25, 156);">cartel. So when oligopolists form artels, 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, or the duopolitsts (in this situation) 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<span style="font-size: 140%; font-family: Impact,Charcoal,sans-serif; color: rgb(237, 49, 49);"> Nash equilibrium.

media type="file" key="econ1 3.m4a" So now, let's examine how **<span style="color: rgb(209, 90, 35); font-size: 120%; font-family: 'Arial Black',Gadget,sans-serif;">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 = In economics, you might have heard of the ** game theory **, the study of how people behave in strategic situations.

This is one of the most famous scene from the movie **A Beautiful Mind**. This is the part where John Nash comes up with the game theory while he is "hanging out" with his friends: media type="youtube" key="srgdg5tgPJk" height="344" width="425" source: http://kr.youtube.com/watch?v=srgdg5tgPJk

One of the most important "game" from the game theory is the ** prisoners' dilemma **, which shows the difficulty of maintaining cooperation.

<span style="color: rgb(20, 240, 145);">The Prisoners' Dilemma
Let's take a look at this weird funny explanation of Prisoners' Dilemma: media type="youtube" key="JdWmVbX6jok" height="344" width="425" source: http://kr.youtube.com/watch?v=JdWmVbX6jok

source: http://www.beyondintractability.org/essay/prisoners_dilemma/

So, how does this relate to Oligopolies? The concept of Prisoners' Dilemma is similar to the game oligopolists play in trying to reach the monopoly outcome.

There are a couple examples of the Prisoners' Dilemma mentioned in the textbook: <span style="color: rgb(252, 3, 246);">arms races and <span style="color: rgb(252, 3, 246);">common resources. We can also see Prisoners' Dilemma in our daily life situations. Think of a case of the police questioning two suspects. The police wouldn't want the suspects to cooperate because it would allow the police to convict more criminals.

=<span style="color: rgb(0, 125, 255);">Public Policy Toward Oligopolies = Because cooperation among oligopolists is undesirable, policymakers try to induce firms in an oligopoly to compete rather than cooperate. One way that policy discourages cooperation is by using **<span style="color: rgb(251, 104, 4); font-size: 110%;">Restraints of Trade and the Antitrust Laws **. Usually, freedom of contract is an essential part of a market economy. By using contracts, the businesses and households can rely on the court system to enforce contracts.<span style="color: rgb(253, 18, 112);"> <span style="color: rgb(40, 244, 16);">

=<span style="color: rgb(40, 244, 16);">Summary =
 * Oligopolists maximize profit by forming cartel and acting like monopolist.
 * Oligopolists have fewer sellers and sell similar products
 * Prisoners' dilemma shows how self-interest can prevent people from cooperating.
 * Antitrust laws prevent oligopoly from engaging in behavior that reduces competition

=<span style="color: rgb(253, 18, 112);">Problems and Application = 1. Which of the following does NOT describe the characteristics of oligopoly ? a. few sellers b. price makers c. price takers d. sell similar products

2. Briefly explain the concept of Prisoners' Dilemma.

Solutions: 1. c. price takers 2. Prisoners' Dilemma shows the difficulty of maintaining cooperation through an example of prisoners.