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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 societyas 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 oneanother 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 outcome is less likely - 2 producers now raises to 4 producers >> each must decide on their own how much to produceo Output effect: b/c price is above marginal cost, selling one more unit at the going price will raise profito 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 productiono If the price effect is larger than the output effect: do not raise production; would be profitable to decrease productiono Each oligopolist continues to increase production until these 2 marginal effects exactly balanceo 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


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UMD ECON 200 - Chapter 17: Oligopoly

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