Oligopoly Pricing Chapter 16 completion

Why People/Firms Sometimes Cooperate Price fixing is using collusion among competitors to fix prices If firms cooperate oligopoly prices rise toward monopoly prices If firms focus on future profits they are more likely to cooperate in repeated games than cheat in a single game Lesson: Collusion among firms is more likely in long run!

Illegal Pricing Practices . . .

Concentration Ratio Measure of the % of market 4 firms control Economists believe 40% & higher is the standard for oligopolies 86% 4 Firm Concentration Ratio Cigarettes 99% Batteries 90% Breweries 89% Light Bulbs 89% Wireless 86% Cereals 83% OPEC = 50%

Oligopolies: Maximizing Profit Oligopolists could maximize profits by forming a cartel & acting like a monopolist However, if oligopolists make decisions individually oligopoly equilibrium : Quantity is higher Price is lower Profit is lower DWL is smaller Monopoly versus

Monopoly vs. Oligopoly vs. Competitive As the # of sellers in an oligopoly rises, the market looks more like a competitive market Price approaches marginal cost & quantity approaches the socially efficient level (P = MC) (allocative efficiency!)

Game Theory Handout

Article: Rise of Oligopolies Why Now? Potential Benefits Risks

Game Theory Video   http://www.youtube.com/watch?v=zpahL4fu5R8