31 October ECON 1116 Oligopoly profits few firms Strategic pricing Characterized by barriers to entry strategic pricing concerns positive o Oligopolists recognize mutual dependence o Take other firms behavior into account o Models depend on nature of interaction between firms o Collusion Exists when firms cooperate to raise joint profits Cartel is the strongest form o Explicit arrangement between sellers o Ex OPEC Tacit collusion implicit o Firms limit production raise prices that raise each others profits without explicit agreement Act closer to a single firm Barriers to collusion Explicit collusion is often prohibited Collusion is hard to sustain o Sufficient disincentive may not exist to prevent self interested behavior Models o The price and output of oligopoly exists somewhere between perfect competition and monopoly o More oligopolists yields an outcome closer to perfect competition o Fewer oligopolists yields an outcome closer to monopoly o Collusion decreases when there are more firms o Stable equilibrium may not always exist Game theory attempts to explain the behaviors of oligopolists o Prisoner s dilemma o Nash equilibrium occurs when each player takes action that is best response given actions taken by the other players and vice versa Noncooperative equilibrium o With repeated interactions collusion is sustainable maybe Tit for tat strategy Cooperate at first then do whatever the other player did in the previous period One time gain from deviation may be outweighed by long run loss
View Full Document
Unlocking...