ECON 1116 31 OctoberOligopoly- Characterized by barriers to entry, strategic pricing concerns, positive profits, few firms- Strategic pricingo Oligopolists recognize mutual dependence o Take other firms’ behavior into accounto Models depend on nature of interaction between firmso Collusion Exists when firms cooperate to raise joint profits- Cartel is the strongest formo Explicit arrangement between sellerso 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 sustaino Sufficient disincentive may not exist to prevent self-interested behavior- Modelso The price and output of oligopoly exists somewhere between perfect competition and monopolyo More oligopolists yields an outcome closer to perfect competitiono Fewer oligopolists yields an outcome closer to monopolyo Collusion decreases when there are more firmso Stable equilibrium may not always exist- Game theory attempts to explain the behaviors of oligopolistso Prisoner’s dilemmao Nash equilibrium: occurs when each player takes action that is best-response given actions taken by the other players and vice versa Noncooperative equilibriumo 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
View Full Document
Unlocking...