1. Ch. 16 Oligopoly

2. Oligopoly Only a few sellers offer similar or identical products
Actions of any seller can have large impact on profits of other sellers

3. Game Theory Study of how people behave in strategic situations
Each firm has to act strategically – tension between cooperation and self-interest
Group of oligopolists better off cooperating and acting like a monopolist, but there is also incentive to act on its own

4. Duopoly Oligopoly with only two members
Collusion – agreement among firms in a market about production and pricing
Cartel – Group of firms acting in unison

5. Equilibrium for Oligopoly
Look at case of perfect comp. vs. monopoly; oligopoly in middle
Where would they maximize profit if allowed to collude?
Nash Equilibrium – when economic actors interact with one another and choose their best strategy given the strategy of others

6. Equilibrium for Oligopoly
Would be better off cooperating and reaching monopoly outcome
Instead, they pursue self-interest and end up at point where total production rises and price falls from monopolistic outcome
Still fall short of competitive firms’ output level and at a higher price

7. Size of an Oligopoly
As # of firms in oligopoly market increases, the output moves toward competitive outcome
Output effect vs. Price effect
Price will approach MC; Q will approach socially efficient level

8. Economics of Cooperation
Prisoners’ Dilemma: “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

9. Prisoners’ Dilemma Payoff Matrix shows decisionmaking possibilities
Dominant Strategy: strategy that is best for a player in a game regardless of the strategies chosen by the other players