Chapter 17 Vobab Oligopoly A market structure in which only a few sellers offer SIMILAR or IDENTICAL products Duopoly Oligopoly with only two members Game Theory The study of how people behave in strategic decisions Collusion Agreement among firms in a market about quantities to produce or prices to charge Cartel A group of firms acting in unison Nash Equilibrium A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen Prisoners Dilemma A particular Game between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial Can be solved if played enough through a strategy known as tit for tat According to tit for tat a player should start by cooperating and then do what ever the other player did the last time Dominant Strategy A strategy that is best for a player in a game regardless of the strategies chosen by the other players Dominant Strategy Dominant Strategy Output Effect Because the price is above Marginal Cost selling one more gallon of water at the going price will raise profit Price Effect Raising production will increase the total amount sold which will lower the price of a good and lower the profit on all the other products If the output effect is larger than the price effect the owner of a company If the price effect is larger than the output effect the company owner will will increase production not raise production Each oligopolist continues to increase production until these 2 marginal effects exactly balance taking the other firms production as given 3 Antitrust Controversies Resale Price Maintenance Prevents retailors from competing on a price due to a requirement by the producer for the retail store to sell the product for a certain price This is sometimes perceived as an attempt to reduce competition Business practices that appear to reduce competition may in fact have legitimate purpose Predatory Pricing Owning a majority of a monopoly and attempting to drive out the new competitor by pricing lower than the new competitor to hopefully gain the full monopoly back and raise prices again is known as predatory pricing Arguments support that this doesn t always work because the new competitor can simply cut back on sales and the bigger firm is negatively affected Tying If a company offers two products together for a single price rather than separately it is said to be tying The actions of any one seller in the market can have a large impact on the profits of all the other sellers Oligopolists and Society and are better off when they cooperate and act like a MONOPOLIST Producing a small quantity of output and charging a price about Marginal Cost If Duopolists individually pursue their own self interests when deciding how much to produce they produce a total quantity greater than the monopoly quantity charge a price lower than the the monopoly price and earn a total profit less than a monopolist 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 Members of a cartel need to agree on production levels for each member and find someway to enforce the agreement in order to be the most successful As a cartel grows LARGER the outcome of agreeing on production levels and forming an agreement become less likely Reaching and enforcing an agreement becomes more difficult as the size of the group increases The LARGER the number of sellers the less each seller is concerned about its own impact on the market price As the oligopoly grows in size the magnitude of the price effect falls When the oligopoly grows very large the price effect disappears altogether like a competitive firm A competitive firm only considers the output effect when deciding how much to produce because a competitive firm is a price taker the price effect is absent As the number of sellers in an oligopolist 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 OPEC Organization of Petroleum Exporting Countries formed in 1960 a cartel of all the countries that produce most of the worlds oil When oligopolists try to maintain monopoly profits lack of cooperation is desirable for society as a whole The monopoly outcome is good for the oligopolists but bad for the Sherman Antitrust Act Firms cannot talk P Sherman 42 Wallaby Way consumers of the product Sydney Clayton Act on 1914 If a person can prove he was damaged by an illegal arrangement to restrain trade that person could sue and recover three times the damages he sustained ways that These laws are used to prevent oligopolists from acting together in would make their markets less competitive Adam Smith 18th Century economist who wrote the Wealth of Nations Oligopolies would like to act like monopolies but self interest drives them toward competition
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