AP Microeconomics Oligopoly Warm Up: Who is the main competitor for each of the pictured firms? How are all of these firms both powerful and weak?

Oligopoly Characteristics  An industry with a small number of firms selling a standardized or differentiated product; these few firms control at least 2/3’s (67%) of the industry collectively.  Significant pricing power (Lerner Index)  Significant barriers to entry; sheer size of the few firms prevents others firms from entering the market (Herfindahl Index)

Oligopoly Characteristics Examples include : –Airlines –Soft drinks –Car Manufacturers –Car tires –Beer –Cereal makers Unlike Perfect Competition that are so small that they have no effect on each other and monopolies that face an entire market alone, oligopolistic firms must consider the reactions of their rivals to marketing decisions.

Oligopoly Models: There are four different models that all represent oligopolies (a few firms dominating the industry). 1.Collusion Model 2.Kinked Demand Curve Model 3.Duopoly 4.Price Leadership

1. Collusion Model a)The small group of controlling firms conspire on price and output and the result is exactly the same as it would be if a monopoly controlled the entire industry { P  (MR = MC) } b) Ex) Cartels like OPEC Output Price & Cost Demand MR MC QXQX PXPX ATC Profit

2. Kinked Demand Curve Model a.The demand curve facing each individual firm has a “kink” in it. b.Firms will follow each other if they cut prices but not if they raise prices c.The demand above P is elastic and raising prices will decrease total revenue d.The demand below P is inelastic and changing price will see little change in demand for products Output Price & Cost Demand MR MC QXQX PXPX ATC Profit

More Oligopoly Models (3) Duopoly (Cournet Model) a.Two firms controlling market b.Was once a monopoly but another firm was able to grasp some of the market (4) Price Leadership a. There is a dominant firm and this firm will change price and the others will be forced to follow

Strategy!!! Because oligopolies follow one another, they must strategize as to what the competition is always doing!! Game Theory: Considers the strategic decisions of “players” in anticipation of their rival’s reaction. Often illustrated in a payoff matrix. Let’s Play: John Nash “A Beautiful Mind”

RaiseLower Raise400, , 500 Lower600, , -500 LIZ BOBBOB What would you do? Dominant Strategy: Bob = Lower: chance to make most or lose least the strategy that is the best regardless of what the opponent does.

Player 2 chooses Left Player 2 chooses Right Player 1 chooses Up 4, 3–1, –1 Player 1 chooses Down 0, 03, 4 #1: Earn the Most Points #2: Do Not Let your Opponent Win!!

CooperateDefect Cooperate2, 20, 3 Defect3, 01, 1 Do you cooperate with police or lie (defect) The numbers represent extra years in prison you get for attempting an escape; so you want the least amount of years!!!

As times get more complicated: ROCK~PAPER~SCISSORS!!! Is there a dominant strategy?