Warm-Up Draw a correctly-labeled graph for both a perfectly-competitive firm and a monopolist operating at long-run equilibrium. Indicate the equilibrium price and quantity

Simulation Form into teams of 4 Earn the most money to win Play either an “X” or “O” card Receive payoff based on decision DO NOT talk with other groups

Introduction to Oligopolies Chapter 15: Oligopoly (pages 388-395)

Oligopolies Defined

Examples of Oligopoly Pepsi vs. Coke OPEC Wireless phone providers TV services Airlines Computer operating systems

Oligopolies are … Interdependent Duopolies (in simplest form) Decisions by one firm impact others Success dependent on others Duopolies (in simplest form) Consists of 2 firms in a market Have significant incentives to cheat

Working Together… Firms have incentive to collude Strongest form of collusion is a cartel Formal agreement to collude Illegal in the U.S. May result in non-cooperative behavior (cheating)

Gas Station Example… 2 stations in town Each has 50% of the market MC = $1/gallon

But How Do We Know? MS12 + MS22 + MS32 = HHI Herfindahl-Hirschman Index (HHI) Used to define the market structure HHI < 1,000  Perfectly competitive 1,001 < HHI < 1,500  Somewhat HHI > 1500  Oligopoly MS12 + MS22 + MS32 = HHI

Examples of HHI Industry HHI Largest Firms Market Structure PC operating systems 9,182 Microsoft, Linux Oligopoly Wide-body aircraft 5,098 Airbus, Boeing Automobiles 1,432 GM, Ford, Toyota, Honda Moderately competitive Retail grocers 321 Wal-Mart, Safeway, Kroger, Albertsons, Wegmans, Costco Competitive

How Firms compete… Quantity competition Price competition When output is fixed Firms “divvy” up market Limited opportunity to cheat Price competition Firms try to “undercut” competition Leads to outcome where P=MC