Oligopoly Chapter 16

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 uOligopoly u Only a few sellers, each offering a similar or identical product to the others. uMonopolistic Competition u Many firms selling products that are similar but not identical.

Characteristics of an Oligopoly Market uFew sellers offering similar or identical products uInterdependent firms uThey are best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost.

Markets With Only a Few Sellers Because of there being few sellers, the key features of oligopoly are the interdependence between firms and the resulting tension between cooperation and self-interest.

A Duopoly Example: Demand Schedule for Water

A Duopoly Example: Price and Quantity Supplied uThe socially efficient quantity of water is 120 gallons, but a monopolist would produce only 60 gallons of water. uSo what outcome then could be expected from duopolists?

Competition, Monopolies, and Cartels uThe duopolists may agree on a monopoly outcome. u Collusion u The two firms may agree on the quantity to produce and the price to charge. u Cartel u The two firms may join together and act in unison.

To simplify the analysis, suppose that each producer must make ten unit increments in output produced.

The Equilibrium for an Oligopoly A Nash equilibrium is a situation in which economic actors, interacting with one another but making uncoordinated choices, each chooses its best strategy given the strategies that all the others have chosen. In the above example, each producing 40 units is a Nash Equilibrium.

This is an example of the prisoners’ dilemma; the individuals are unable to coordinate their decisions but the payoff each receives depends upon the choices made by both. In general, game theory is the study of how people behave in strategic situations (i.e., situations in which decisionmakers must consider how others might respond.

In this example, Jack and Jill each selling 40 units is the Nash equilibrium. A dominant strategy is one that is best for a player in a game regardless of the strategies chosen by the other players.

Summary of Equilibrium for an Oligopoly uPossible outcome if oligopoly firms pursue their own self-interests: u Joint output is greater than the monopoly quantity but less than the competitive industry quantity. u Market prices are lower than monopoly price but greater than competitive price. u Total profits are less than the monopoly profit.