1. Comparison of Market Structures
Competitive
Monopoly
Oligopoly
Large number of firms
One firm
Small number of interdependent firms*
Free entry and exit
Barriers to entry
Homogenous product
One product / no substitutes
Could be homogenous or differentiated products
* “Interdependent” means that the actions of one firm affect the other firms.

2. Comparison of Market Structures
Pure
Competition
Monopolistic Competition
Oligopoly
Monopoly
Tacit
Collusive
More Competitive
Less Competitive
Common in the real world
Rare in the real world

3. Collusive Oligopoly
Collusion: An agreement among firms to fix prices, or divide the market between them, so as to limit competition and maximize profit
Cartel (or formal collusion) a formal agreement between firms in an industry to form a collusive oligopoly, i.e., to take action to limit competition in the industry
The best known cartel is OPEC, the Organization of Petroleum Producing Nations
Some sports leagues (e.g., the National Football League in the US) are also cartels
There aren’t many other examples because formal collusion is illegal in most countries

4. Collusive Oligopoly
Draw a diagram showing how a cartel determines its output quantity.
(Hint: this is the same as asking “how does a cartel maximize its profits”.)

5. Cartel Price & Output Decisions
Price and Output Decision – Collusive Oligopoly
Cartel Price & Output Decisions
How do you think this cartel could allocate production capacity among its members?

6. Cartel Price & Output Decisions
Price and Output Decision – Collusive Oligopoly
Cartel Price & Output Decisions
How do you think this cartel could allocate production capacity among its members?
Many methods: historical output, size of assets, size of local market, etc.
They could also agree compete for market share on a non-price basis

7. Collusive Oligopoly
Using a diagram, explain why cartels are illegal in most countries.

8. Efficiency Loss in Collusive Oligopoly
Social Surplus In Pure Competition
Social Surplus In Collusive Oligopoly TR
Quantity is reduced and price is increases, relative to pure competition
This hurts consumers (reduced surplus) and creates deadweight loss
The reduced output also means that resources are being under-allocated to this product

9. Pure Competition is Productively Efficient in the Long Run
Efficiency Loss in Collusive Oligopoly
Pure Competition is Productively Efficient in the Long Run
Monopoly Is Not TR
Not at minimum
Because a cartel produces at a point where average total costs (ATC) are not minimized, it is also productively inefficient
I.e., It is not producing at the lowest possible cost (the economy will be inside the production possibilities frontier)

10. Obstacles to Forming and Maintaining Cartels
Threat of legal sanctions
Incentive to cheat
Recessions
Lack of a dominant firm
Potential entry into the market
Cost differences among firms
Product differentiation leads to different demand curves
Larger numbers of firms are harder to control

11. Game Theory – The Prisoner’s Dilemma
You are in the space travel industry. There is one rival company.
You are trying to determine what price to charge for a moon trip.
Moon trips are very expensive luxury goods, so customers are price sensitive. Therefore, if charge a bit less than your rival, you can take many of his/her customers.

12. Game Theory – A Beautiful Mind

13. Comparison of Market Structures
Competitive
Monopoly
Oligopoly
Large number of firms
One firm
Small number of interdependent firms*
Free entry and exit
Barriers to entry
Homogenous product
One product / no substitutes
Could be homogenous or differentiated products
* “Interdependent” means that the actions of one firm affect the other firms.

14. Game Theory: a mathematical technique used to analyze competitive situations where the outcome of a participant’s choice depends on the actions of other participants
E.g., the prisoners dilemma; the blonde or the brunettes
Can you think of any others?

15. Game Theory: a mathematical technique used to analyze competitive situations where the outcome of a participant’s choice depends on the actions of other participants
This is one of the characteristics of oligopoly – “small number of interdependent firms”
This interdependence leads to conflicting incentives:
Incentive to collude: leads to reduced uncertainty (re: competitor behavior) and higher total industry profit
=> a bigger total pie
Incentive to compete: to capture market share from rivals => a larger slice of the pie

16. Strategic Interdependence
In summary, oligopolies are characterized by strategic interdependence
Firms plan their actions based on guesses about what their rivals will do

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Question: Why would northland accept a lower price?
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21. = Economic Growth Less Government Revenues Government Expenditures
Budget Surplus or Deficit* =
Less
* Surplus if positive, deficit if negative