Imperfect Competition CHAPTER © 2012 McGraw-Hill Ryerson Limited

Oligopoly Characteristics It is dominated by a few large firms. Entry by new firms is difficult. Non-price competition between firms is widely practiced. Each firm has significant control over its price. Mutual interdependence exists between firms. Products can be either homogeneous or differentiated. 11-2© 2012 McGraw-Hill Ryerson Limited LO4

Oligopoly Mutual interdependence the condition in which a firm’s actions depend, in part, on the reactions of rival firms 11-3© 2012 McGraw-Hill Ryerson Limited LO4

Collusion an agreement among suppliers to set the price of a product or the quantities each will produce Game Theory a method of analyzing firm behaviour that highlights mutual interdependence among firms 11-4© 2012 McGraw-Hill Ryerson Limited LO5

Game Theory Nash Equilibrium a situation where each rival chooses the best actions given the (anticipated) actions of the other(s) 11-5© 2012 McGraw-Hill Ryerson Limited LO5

Game Theory 11-6© 2012 McGraw-Hill Ryerson Limited LO5

Collusive Oligopoly Cartel an association of sellers acting in unison for example, Organization of Petroleum Exporting Countries (OPEC) able to increase prices by restricting output cartels work to the advantage of their members only if there is no cheating among the participants 11-7© 2012 McGraw-Hill Ryerson Limited LO5

Non-collusive Oligopoly Price Leadership When rival firms engage in what amounts to price fixing without overt collusion A leader – usually the largest or most efficient firm – sets price, other firms follow Must balance the advantages of a price increase with the risks of creating an opening for new entrants 11-8© 2012 McGraw-Hill Ryerson Limited LO6

Oligopoly Some believe that oligopolies are too powerful and produce inefficiently Others take the view that oligopolies are at the cutting edge of new technological development and, in the long run, push the average costs of production down 11-9© 2012 McGraw-Hill Ryerson Limited LO6