1. Warm-Up
Draw a correctly-labeled graph for both a perfectly-competitive firm and a monopolist operating at long-run equilibrium.
Indicate the equilibrium price and quantity

2. Simulation Form into teams of 4 Earn the most money to win
Play either an “X” or “O” card
Receive payoff based on decision
DO NOT talk with other groups

3. Introduction to Oligopolies
Chapter 15: Oligopoly (pages )

4. Oligopolies Defined

5. Examples of Oligopoly Pepsi vs. Coke OPEC Wireless phone providers
TV services
Airlines
Computer operating systems

6. Oligopolies are … Interdependent Duopolies (in simplest form)
Decisions by one firm impact others
Success dependent on others
Duopolies (in simplest form)
Consists of 2 firms in a market
Have significant incentives to cheat

7. Working Together… Firms have incentive to collude
Strongest form of collusion is a cartel
Formal agreement to collude
Illegal in the U.S.
May result in non-cooperative behavior (cheating)

8. Gas Station Example… 2 stations in town Each has 50% of the market
MC = $1/gallon

10. But How Do We Know? MS12 + MS22 + MS32 = HHI
Herfindahl-Hirschman Index (HHI)
Used to define the market structure
HHI < 1,000  Perfectly competitive
1,001 < HHI < 1,500  Somewhat
HHI > 1500  Oligopoly
MS12 + MS22 + MS32 = HHI

11. Examples of HHI Industry HHI Largest Firms Market Structure
PC operating systems
9,182
Microsoft, Linux
Oligopoly
Wide-body aircraft
5,098
Airbus, Boeing
Automobiles
1,432
GM, Ford, Toyota, Honda
Moderately competitive
Retail grocers
321
Wal-Mart, Safeway, Kroger, Albertsons, Wegmans, Costco
Competitive

12. How Firms compete… Quantity competition Price competition
When output is fixed
Firms “divvy” up market
Limited opportunity to cheat
Price competition
Firms try to “undercut” competition
Leads to outcome where P=MC