Chapter 17 Oligopoly Introduction Markets with Only a Few Sellers oligopoly market structure in which only a few sellers offer similar or identical products game theory study of how people behave in strategic situations duopoly oligopoly with only two members collusion agreement among firms in a market about quantities to produce or prices to charge cartel a group of firms acting in unison A cartel must agree not only on the total level of production but also on the amount produced by each member Nash equilibrium economic factors interacting with one another each choose their best strategy given the strategies that all the other factors have chosen when firms in an oligopoly individually choose production to maximize profit they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition The oligopoly price is less than the monopoly price but greater than the competitive price which equals marginal cost How the Size of an oligopoly Affects the Market Outcome Reaching and enforcing an agreement becomes more difficult as the size of the group increases The output effect Because price is above marginal cost selling 1 more gallon of water at the going price will raise 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 gallons sold o If the output effect is larger than the price effect the well owner will increase production o If the price effect is larger than the output effect the owner will not raise production Each oligopolist continues to increase production until these two marginal effects exactly balance taking the other firms production as give as the number of sellers in an oligopoly grows larger an oligopolistic market looks more and more like a competitive market The price approaches marginal cost and the quantity produced approaches the socially efficient level The Economics of Cooperation The Prisoner s Dilemma prisoners dilemma a particular game between 2 capture prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial dominant strategy a strategy that is best for a player in a game regardless of he strategies chosen by the other players The logic of self interest takes over and leads them to confess Cooperation between the two prisoners is difficult to maintain because cooperation is individually irrational Oligopolies as a Prisoners Dilemma each oligopolist has an incentive to cheat Just as self interest drives the prisoners in the prisoners dilemma to confess self interest makes it difficult for the oligopoly to maintain the cooperative outcome with low production high prices and monopoly profits
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