1、,Oligopoly,Chapter 16,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to:Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,Imperfect Competition,Imperfect competi
2、tion refers to those market structures that fall between perfect competition and pure monopoly.,Imperfect Competition,Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.,Types of Imperfectly Competitive Markets,Oli
3、gopolyOnly a few sellers, each offering a similar or identical product to the others.Monopolistic CompetitionMany firms selling products that are similar but not identical.,The Four Types of Market Structure,Monopoly,Oligopoly,Monopolistic Competition,Perfect Competition,Tap water Cable TV,Tennis ba
4、lls Crude oil,Novels Movies,Wheat Milk,Number of Firms?,Type of Products?,Markets With Only a Few Sellers,Because of the few sellers, the key feature of oligopoly is the tension between cooperation and self-interest.,Characteristics of an Oligopoly Market,Few sellers offering similar or identical pr
5、oductsInterdependent firmsBest off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost,A Duopoly Example,A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.,A Duopoly Example: Demand Schedule for
6、 Water,A Duopoly Example: Price andQuantity Supplied,The price of water in a perfectly competitive market would be driven to where the marginal cost is zero:P = MC = $0Q = 120 gallonsThe price and quantity in a monopoly market would be where total profit is maximized:P = $60Q = 60 gallons,A Duopoly
7、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?,Competition, Monopolies, and Cartels,The duopolists may agree on a monopoly outcome.CollusionTh
8、e two firms may agree on the quantity to produce and the price to charge.CartelThe two firms may join together and act in unison.,Competition, Monopolies, and Cartels,Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit expli
9、cit agreements among oligopolists as a matter of public policy.,The Equilibrium for an Oligopoly,A 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.,The Equilibrium for an Oligop
10、oly,When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition.,The Equilibrium for an Oligopoly,The oligopoly price is less than the monopoly price but grea
11、ter than the competitive price (which equals marginal cost).,Summary of 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 mon
12、opoly price but greater than competitive price.Total profits are less than the monopoly profit.,A Duopoly Example: Demand Schedule for Water,How the Size of an Oligopoly Affects the Market Outcome,How increasing the number of sellers affects the price and quantity:The output effect: Because price is
13、 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.,How the Size of an Oligopoly Affects the Market Outcome,As the number of sellers in an oligopoly grows larger, an oligopolistic market
14、 looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level.,Game Theory and the Economics of Cooperation,Game theory is the study of how people behave in strategic situations.Strategic decisions are those in w
15、hich each person, in deciding what actions to take, must consider how others might respond to that action.,Game Theory and the Economics of Cooperation,Because the number of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only
16、on how much it produced but also on how much the other firms produce.,The Prisoners Dilemma,The prisoners dilemma provides insight into the difficulty in maintaining cooperation.,Often people (firms) fail to cooperate with one another even when cooperation would make them better off.,The Prisoners D
17、ilemma,Bonnies Decision,Confess,Remain Silent,Confess,Remain Silent,Clydes Decision,Clyde gets 8 years,Bonnie gets 8 years,Bonnie gets 20 years,Bonnie gets 1 year,Bonnie goes free,Clyde gets20 years,Clyde gets 1 year,Clyde goes free,The Prisoners Dilemma,The dominant strategy is the best strategy fo
18、r a player to follow regardless of the strategies pursued by other players.,The Prisoners Dilemma,Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.,Oligopolies as a Prisoners Dilemma,Iraqs Decision,High Production,Low Production,High Prod
19、uction,Low Production,Irans Decision,Iran gets $40 billion,Iraq gets $40 billion,Iraq gets $30 billion,Iraq gets$50 billion,Iraq gets $60 billion,Iran gets$30 billion,Iran gets $50 billion,Iran gets $60 billion,Oligopolies as a Prisoners Dilemma,Self-interest makes it difficult for the oligopoly to
20、maintain a cooperative outcome with low production, high prices, and monopoly profits.,An Arms-Race Game,Decision of the United States (U.S.),Arm,Disarm,Arm,Disarm,Decision of the Soviet Union (USSR),USSR at risk,U.S. at risk,U.S. at risk and weak,U.S. safe,U.S. safe and powerful,USSR at risk and we
21、ak,USSR safe,USSR safe and powerful,An Advertising Game,Marlboros Decision,Advertise,Dont Advertise,Advertise,Dont Advertise,Camels Decision,Camel gets $3 billion profit,Marlboro gets $3 billion profit,Marlboro gets $2 billion profit,Marlboro gets $4 billion profit,Marlboro gets $5 billion profit,Ca
22、mel gets $2 billion profit,Camel gets $4 billion profit,Camel gets $5 billion profit,A Common-Resources Game,Exxons Decision,Drill Two Wells,Drill One Well,Drill Two Wells,Drill One Well,Arcos Decision,Arco gets $4 million profit,Exxon gets $4 million profit,Exxon gets $3 million profit,Exxon gets $
23、5 million profit,Exxon gets $6 million profit,Arco gets $3 million profit,Arco gets $5 million profit,Arco gets $6 million profit,Why People Sometimes Cooperate,Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.,Jac
24、k and Jills Oligopoly Game,Jacks Decision,Sell 40 gallons,Sell 30 gallons,Sell 40 gallons,Sell 30 gallons,Jills Decision,Jill gets $1,600 profit,Jack gets $1,600 profit,Jack gets $1,500 profit,Jack gets $1,800 profit,Jack gets $2,000 profit,Jill gets $1,500 profit,Jill gets $1,800 profit,Jill gets $
25、2,000 profit,Public Policy Toward Oligopolies,Cooperation among oligopolists is undesirable from the standpoint of society as a whole because it leads to production that is too low and prices that are too high.,Restraint of Trade and the Antitrust Laws,Antitrust laws make it illegal to restrain trad
26、e 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 Predatory pricingTying,Resale Price Maintenance,Resa
27、le price maintenance (or fair trade) occurs when suppliers (like wholesalers) require the retailers that they sell to, to charge customers a specific amount.,Predatory Pricing,Predatory pricing occurs when a large firm begins to cut the price of its product(s) with the intent of driving its competit
28、or(s) out of the market.,Tying,Tying refers to when a firm offers two (or more) of its products together at a single price, rather than separately.,Summary,Oligopolists maximize their total profits by forming a cartel and acting like a monopolist.If oligopolists make decisions about production level
29、s individually, the result is a greater quantity and a lower price than under the monopoly outcome.,Summary,The prisoners dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. The logic of the prisoners dilemma appli
30、es in many situations, including oligopolies.,Summary,Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition.,The Four Types of Market Structure,The Prisoners Dilemma,Oligopolies as a Prisoners Dilemma,An Arms-Race Game,An Advertising Game,A Common-Resources Game,Jack and Jills Oligopoly Game,
