harcourt brace & company oligopoly chapter 16. harcourt brace & company the spectrum of...

Harcourt Brace & Company

OLIGOPOLY

Chapter 16


The Spectrum of Market Structures


The Spectrum of Market Structures

Number of Firms?

Type of Product?

MonopolisticCompetition

Novels Movies

PerfectCompetition

Wheat Milk

OneFirm

FewFirms

Many Firms

Differentiated Identical

Monopoly

Tap water Cable TV

Oligopoly

Tennis balls Crude oil


Imperfect Competition

Market structures that fall between perfect competition and pure monopoly.


Imperfect Competition

Industries in which firms have competitors but do not face so much competition that they are price takers.


Types of Imperfectly Competitive Markets

Oligopoly Only a few sellers, each offering a

similar or identical product to the others.

Monopolistic Competition Many firms selling products that

are similar but not identical.


Oligopoly: Markets With Only a Few Sellers

Because of the few sellers, the actions of any one seller in the market can have a large impact on the profits of all the other sellers.


Characteristics of an Oligopoly Market

Few sellers offering similar or identical products

Interdependent firms Best off cooperating and acting

like a monopolist by producing a small quantity of output and charging a price above marginal cost


Duopoly Example

A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.

Duopoly Example: Demand Schedule for Water


Duopoly Example: Price andQuantity Supplied

The price and quantity of water in a perfectly competitive market would be:

P = MC = $0Q = 120 gallons

The price and quantity in a monopoly market would be:

P = $60Q = 60 gallons


Duopoly Example: Price andQuantity Supplied

The socially efficient quantity of water is 120 gallons, but a monopolist would produce only 60 gallons of water.

So what outcome then could be expected from duopolists?


Outcome from Duopoly Example

The duopolists may agree on a monopoly outcome.

Collusion The two firms may agree on the

quantity to produce and the price to charge.

Cartel The two firms may join together and

act in unison.


Nash Equilibrium

Nash equilibrium is a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen.


Nash Equilibrium

Nash Equilibrium

n/(n + 1) where n is the number of firms in the industry.

If n = 2, then the joint output would be 2/3 of the competitive market.

Qjoint = 2/3(120 gallons) = 80 gallons

Qeach firm = 80/2 = 40 gallons


Equilibrium for an Oligopoly

Possible outcome if oligopoly firms pursue their own self-interests:

Joint output is greater than the monopoly quantity but less than the competitive industry quantity.

Market prices are lower than monopoly price but greater than competitive

price. Total profits are less than the monopoly

profit.


Size of an Oligopoly and Market Outcome

How increasing the number of sellers affects the price and quantity:

The output effect: Because price is above marginal cost, selling more at the going price raises profits.

The price effect: Raising production lowers the price and the

profit per unit on all units sold.


Size of an Oligopoly and Market Outcome

As the number of sellers in an oligopoly grows larger . . .. . . the market looks more and more like a competitive market. . . . the price approaches marginal cost.. . . the quantity produced approaches the socially efficient level.


Quick Quiz!

If the members of an oligopoly could agree on a total quantity to produce, what quantity would they choose?


Quick Quiz!

If oligopolies do not act together, do they produce a total quantity more or less than in the previous question?


Game Theory and the Economics of Cooperation

Game theory is the study of how people behave in strategic situations.



Strategic decisions are those in which each person (firm) in deciding what actions to take, must consider how others (firms) might respond to that action.



Because the number of firms in an oligopolistic market is small, each firm must act strategically.


Game Theory and the Prisoners’ Dilemma

The prisoners’ dilemma illustrates the difficulty in maintaining cooperation.

Often people (firms) fail to cooperate with one another even when cooperation would make them better off.


The Prisoners’ Dilemma

Person #1 Decision

Choice # 1 Choice # 2

Per

son

# 2

Dec

isio

n

Ch

oic

e #

2C

ho

ice

# 1

Payoff1,1

Payoff2,1

Payoff1,2

Payoff2,2



The dominant strategy is the best strategy for a player to follow regardless of the strategies pursued by other players.



Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.


Oligopolies as a Prisoners’ Dilemma

Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.


Oligopolies as a Prisoners’ Dilemma

The monopoly outcome is jointly rational for the oligopoly, but each oligopolist has an incentive to cheat.


An Oligopoly Examples of the Prisoners’ Dilemma


An Oligopoly Example of the Prisoners’ Dilemma

Iraq’s Decision

High Production Low Production

Iran

’s D

ecis

ion

Lo

w

Pro

du

cti

on

Hig

hP

rod

uc

tio

n

$40 billion for each Iraq gets $30 billionIran gets $60 billion

Iraq gets $60 billionIran gets $30 billion

$50 billion for Each


Other Examples of the Prisoners’ Dilemma

U.S.’ Decision

Arm Disarm

US

SR

’s D

ecis

ion

Dis

arm

Arm Both countries

at risk

U.S. at risk and weakUSSR safe and

powerful

U.S. safe and powerful

USSR at risk and weak

Both countries safe


Other Examples of the Prisoners’ Dilemma

Marlboro’s Decision

Advertise Don’t Advertise

US

SR

’s D

ecis

ion

Dis

arm

Arm $3 billion profit

for each

Marlboro gets $2 billion profit

Camel gets $5 billion profit

Marlboro gets $5 billion profit

Camel gets $2 billion profit

$4 billion profit for each


Why People Sometimes Cooperate

Firms in oligopolies have a strong incentive to collude in order to reduce production, raise prices, and increase profits.

Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.


Public Policy Toward Oligopolies

Cooperation among oligopolists is undesirable.

It leads to production that is too low.

It leads to prices that are too high.


Antitrust Laws

Antitrust laws make it illegal to restrain trade or attempt to monopolize a market.

Sherman Antitrust Act of 1890 Clayton Act of 1914


Controversies over Antitrust Policy

Antitrust policies sometimes may not allow business practices that have potentially positive effects:

Resale price maintenance Tying


Quick Quiz!

What kind of agreement is illegal for businesses to make?

Why are the antitrust laws controversial?


Conclusion

An oligopoly may end up looking more like a monopoly or a competitive market, depending on the number of firms.


Conclusion

Oligopolies can attempt to cooperate with each other but are limited by laws.


Conclusion

Antitrust laws are used to regulate the behavior of oligopolies.


OLIGOPOLY

End of Chapter 16

harcourt brace & company oligopoly chapter 16. harcourt brace & company the spectrum of...

Documents