Oligopoly

Characteristics Few large firms dominate the market Differentiated or homogenous product Barriers to entry Patents Licenses Resource control

Characteristics cont. Mutual interdependence Each firm makes decisions based on what they believe the competition will do Firms DO NOT compete based on prices

Examples Oil/gasoline (OPEC) Pharmaceuticals Automobiles Banking Phones (cell and line) Soda Industry

Cartel Group of oligopoly firms who formally agree not to compete on the basis of price, production, etc.

Collusion Illegal agreement between sellers to cooperate on pricing Firms realize competition holds them back so they agree to restrict supply in order to set higher prices

Game Theory

Example

Example 2

Example 3 Two firms Starbucks and Dunkin Donuts Both sell coffee Both have introduced a new drink “Latte Macchiato” and have to decide if they will advertise or not advertise

Advertise Not Advertise $300, $200 $350, $65 $75, $350 $150, $100

Example 4 Two firms Ben and Jerry’s Both sell ice cream Both have introduced a new dessert and have to decide how much to produce High v Low production

Firm B's output High output Low output Firm A's output $5m, $5m $12m, $4m $4m, $12m $10m, $10m