oligopoly: firms in less competitive markets
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Oligopoly: Firms in Less Competitive Markets. Oligopoly. Oligopoly A market structure in which a small number of interdependent firms compete. The approach we use to analyze competition among oligopolists is called game theory . Oligopoly and Barriers to Entry. 1. LEARNING OBJECTIVE. - PowerPoint PPT PresentationTRANSCRIPT
t h i r t e e nt h i r t e e n c h a p t e rc h a p t e r
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1 st ed.
Prepared by: Fernando & Yvonn Quijano
Oligopoly: Firms in Less Competitive Markets
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Oligopoly A market structure in which a small number of interdependent firms compete.
The approach we use to analyze competition among oligopolists is called game theory.
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Barriers to Entry
LEARNING OBJECTIVE1
Barrier to entry Anything that keeps new firms from entering an industry in which firms are earning economic profits.Examples of Oligopolies in
Retail Trade and Manufacturing
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RETAIL TRADE MANUFACTURINGINDUSTRY FOUR-FIRM
CONCENTRATION RATIO
INDUSTRY FOUR-FIRM CONCENTRATION RATIO
Warehouse Clubs and Superstores
90% Cigarettes 99%
Discount Department Stores 88% Beer 90%
Hobby, Toy, and Game Stores
70% Aircraft 85%
Radio, Television, and Other Electronic Stores
62% Breakfast Cereal 83%
Athletic Footwear Stores 62% Automobiles 80%
College Bookstores 58% Dog and Cat Food 58%
Pharmacies and Drugstores 47% Computers 45%
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Barriers to Entry
In addition to economies of scale, other barriers to entry include:
• Ownership of a key input
• Government–Imposed Barriers
• Patent The exclusive right to a product for a period of 20 years from the date the product was invented.
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LEARNING OBJECTIVE2
Game theory The study of how people make decisions in situations where attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.
Key characteristics of all games:1. Rules that determine what actions are allowable.2. Strategies that players employ to attain their
objectives in the game.3. Payoffs that are the results of the interaction among
the players’ strategies.
Business strategy Actions taken by a business firm to achieve a goal, such as maximizing profits.
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A Duopoly Game: Price Competition between Two Firms
Payoff matrix A table that shows the payoffs that each firm earns from every combination of strategies by the firms.Collusion An agreement among firms to charge the same price, or to otherwise not compete.
13 - 2A Duopoly Game
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A Duopoly Game: Price Competition between Two Firms
Dominant Strategy A strategy that is the best for a firm, no matter what strategies other firms use.
Nash equilibrium A situation where each firm chooses the best strategy, given the strategies chosen by other firms.
In the film, A Beautiful Mind, Russell Crowe played John Nash, winner of the Nobel Prize in Economics.
A Beautiful Mind: Game Theory Goes to the Movies13 - 1
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Firm Behavior and the Prisoners’ Dilemma
Cooperative equilibrium An equilibrium in a game in which players cooperate to increase their mutual payoff.
Noncooperative equilibrium An equilibrium in a game in which players do not cooperate but pursue their own self-interest.
Prisoners’ dilemma A game where pursuing dominant strategies results in noncooperation that leaves everyone worse off.
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Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi?
13 - 1LEARNING OBJECTIVE2
On eBay, bidding the maximum value you place on an item is a dominant strategy.
Is There a Dominant Strategy for Bidding on eBay?13 - 2
Advertising is the optimal decision for both firms, given the decision by the other firm.
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Can Firms Escape the Prisoners’ Dilemma?
13 - 3Changing the Payoff Matrix in a Repeated Game
The airlines have trouble raising the price this business traveler pays for a ticket.
American Airlines and Northwest Airlines Fail to Cooperate on a Price Increase13 - 3
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Cartels: The Case of OPECCartel A group of firms that colludes by agreeing to restrict output to increase prices and profits.
13 - 4World Oil Prices
Sustaining high prices has been difficult because members often exceed their output quotas.
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Cartels: The Case of OPEC
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The equilibrium of this game will occur with Saudi Arabia producing a low output and Nigeria producing a high output.
The OPEC Cartel with Unequal Members
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LEARNING OBJECTIVE3
13 - 6The Decision Tree for an Entry Game
The best decision for Wal-Mart is to build a large store to deter Target’s entry.
Deterring Entry
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Is Deterring Entry Always a Good Idea?
13 - 1LEARNING OBJECTIVE4
In this case, Wal-Mart will build a small store and Target will enter. Deterrence is only worth pursuing if its costs are not too high.
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13 - 7The Decision Tree for a Bargaining Game
Bargaining
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Game theoryNash equilibriumNoncooperative equilibriumOligopolyPatentPayoff matrixPrisoners’ dilemma