Oligopoly Oligopoly is another way to think about firms with some market power Few Firms in the Market Identical Products Some Barrier to entry In Between Monopoly and Perfect Competition Concentration Ratio Percentage of Market s total output that is supplied by 4 top producers listed as a percentage Game Theory A branch of economics and mathematics that studies strategic behavior When payoffs depend not only what you do but also what your opponent does o Essentially your competitor has some bearing on what you do next and what you do helps your competitor make his decisions as well Back and Forth Examples Tic Tac Toe checkers chess Oligopoly market conditions have strategic behavior Strategy and reactions of the other players strategies chosen by the other players Dominant Strategy Decisions or plan chosen by a player which takes into account the behavior a strategy that is best for a player in a game regardless of the Prisoner s Dilemma A game between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial If you confess turn in your partner and he does not confess you will receive no jail time and he will have 10 years If you both confess you both get 5 years If neither of you confess or turn in your partner then you both get 1 year on a lesser charge C C Sabathia Confess Don t confess C Lee 5 CC S 5 C Lee 0 CC S 10 C Lee 10 CC S 0 C Lee 1 CC S 1 Confess C Lee Don t confess If both cooperate with each other and do not confess they are better off o Problem is there is not way to guarantee that cooperation o Called the Cooperative Outcome Sucker Payoff is 10 years Temptation Payoff is 0 Years Nash Equilibrium is the 5 5 outcome We do not know how long any particular game will last o Could be once or an infinite number of times Duopoly When 2 firms control the market One possible duopoly outcome collusion Collusion an agreement among firms in a market about quantities to produce or This way they both have peace of mind and know what they can and prices to charge Cartel A group of firms acting in unison can t charge or supply oil to sell and at what price Collusion vs Self interest Examples OPEC countries who are oil rich who collude with each other how much It is difficult for oligopoly firms to form cartels and honor their agreements o Both firms have incentive to honor the agreement but they also have incentive to renege on the agreement Collusion Strategic Nature means that collusion is difficult and illegal o In a one time interaction is is impossible o Of opponents compete over and over then collusion becomes more attractive because you get high profits for many periods The Output and Price Effects Output Effect o If P MC selling more output raises profits Price Effect o Raising production increases market quantity which reduces market price and reduces profit on all unites sold If output effect price effect the firm increases production If price effect output effect the firm reduces produuction
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