Chapter 17 Oligopoly Oligopoly a market structure in which only a few sellers offer similar or identical products actions of any one seller in the market can have a large impact on the profits of the other sellers interdependent Game theory the study of how ppl behave in strategic situations Markets With Only a Few Sellers Tension between cooperation and self interest Duopoly simplest type 2 members Collusion an agreement among firms in a market about quantities to produce or prices to charge Cartel a group of firms acting in unison Once a group has formed a cartel it acts like a monopoly inefficient outcome Oligopolists would like to form cartels and earn monopoly profits but it is often impossible hard to agree over how to divide profit antitrust laws prohibit agreements If the duopolists individually pursue their own self interest when deciding how much to produce they produce a total quantity greater than the monopoly quantity charge a price lower than the monopoly price and earn total profit less than the monopoly profit Oligopolists are better off cooperating and reaching the monopoly outcome yet because they pursue their own self interest they do not end up reaching the monopoly outcome and maximizing their joint profit Cooperation among oligopolists is undesirable from the standpoint of society as a whole b c it leads to production that is too low and prices that are too high 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 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 As cartel s grow it is harder to agree on production levels and the monopoly 2 producers now raises to 4 producers each must decide on their own outcome is less likely how much to produce o Output effect b c price is above marginal cost selling one more unit at the going price will raise profit o Price effect raising production will increase the total amount sold which will lower the price and lower the profit on all other units sold o If the output effect is larger than the price effect increase production o If the price effect is larger than the output effect do not raise production would be profitable to decrease production o Each oligopolist continues to increase production until these 2 marginal effects exactly balance o When oligopoly grows the price effect disappears 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 Prisoners dilemma a particular game between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial o Examples oil OPEC arms race between USA and Soviet Union common resources Dominant strategy a strategy that is best for a player in a game regardless of the strategies chosen by the other players Is lack of cooperation a problem from the standpoint of society as a whole Answer depends on the circumstances Public Policy Towards Oligopolies To move the allocation of resources closer to the social optimum policymakers should try to induce firms in an oligopoly to compete rather than cooperate 1 Policy discourages cooperation through the common law o Sherman Act elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy o Antitrust laws are used to prevent oligopolists from acting together in ways that would make their markets less competitive o Controversies over antitrust policies Resale price maintenance wholesaler sells DVD to store for 300 and tells store to sell it for 350 good or bad business practices that appear to reduce competition may in fact have legitimate purposes Predatory pricing firm A has a monopoly firm B enters and takes 30 of the market firm A lowers prices to drive firm B out of the market firm A regains control and increases prices again is this even profitable Tying offer to things together at a single price rather than separately
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