1. Figure 12.1 Perfect Price Discrimination
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2. Figure 12.2 Competitive, Single-Price, and Perfect Discrimination Equilibria
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3. Figure 12.3 Quantity Discrimination
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4. Figure 12.4 Multimarket Pricing of Harry Potter DVD
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5. Figure 12.5 Two-Part Tariff
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6. Table 12.2 Bundling of Tickets to Football Game
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7. Table 13.1 Properties of Monopoly, Oligopoly, Monopolistic Competition, and Competition
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8. A Duopoly Example
A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.
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9. Table 1 The Demand Schedule for Water
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10. A Duopoly Example Price and Quantity Supplied
The socially efficient quantity of water is 120 gallons, but a monopolist would produce only 60 gallons of water.
So what outcome then could be expected from duopolists?
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11. The Market for Water Cost Quantity of Output
In a competitive market, quantity would equal 120 and P = MC = $0.
$120
120
Demand
Marginal Revenue
A monopoly would produce 60 gallons and charge $60. Note that P > MC.
$60 60
Total industry output with a duopoly will probably exceed 60, but be less than 120.
MC is constant and = $0.
Quantity of Output
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12. Competition, Monopolies, and Cartels
Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists as a matter of public policy.
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13. The Equilibrium for an Oligopoly
A Nash equilibrium is a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen.
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14. The Equilibrium for an Oligopoly
When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition.
The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).
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15. GAME THEORY AND THE ECONOMICS OF COOPERATION
Game theory is the study of how people behave in strategic situations.
Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
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16. GAME THEORY AND THE ECONOMICS OF COOPERATION
Because the number of firms in an oligopolistic market is small, each firm must act strategically.
Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.
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17. The Prisoners’ Dilemma
The prisoners’ dilemma is a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
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18. Figure 2 The Prisoners’ Dilemma
Bonnie’ s Decision
Confess
Remain Silent
Bonnie gets 8 years
Clyde gets 8 years
Bonnie gets 20 years
Clyde goes free
Confess
Clyde’s
Decision
Bonnie goes free
Clyde gets 20 years
gets 1 year
Bonnie
Clyde gets 1 year
Remain
Silent
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19. Oligopolies as a Prisoners’ Dilemma
The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players.
Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.
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20. Figure 3 Jack and Jill’s Oligopoly Game
Jack’s
Decision
High Production: 40 Gal.
Low Production: 30 gal.
Jack gets $1,600 profit
Jill gets $1,600 profit
Jack gets $1,500 profit
Jill gets $2,000 profit
High
Production
40 gal.
Jill’s
Decision
Jack gets $2,000 profit
Jill gets $1,500 profit
Jack gets $1,800 profit
Jill gets $1,800 profit
Low
Production
30 gal.
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21. Oligopolies as a Prisoners’ Dilemma
Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.
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22. Figure 4 An Arms-Race Game
Decision of the United States (U.S.)
Arm
Disarm
U.S. at risk
USSR at risk
U.S. at risk and weak
USSR safe and powerful
Arm
Decision
of the
Soviet Union
U.S. safe and powerful
USSR at risk and weak
U.S. safe
USSR safe
(USSR)
Disarm
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23. Why People Sometimes Cooperate
Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.
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24. Table 13.2 Profit Matrix for a Quantity-Setting Game
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25. Figure 13.1 Competition Versus Cartel
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26. Figure 13.2 American Airlines’ Profit-Maximizing Output
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27. Figure 13.3 American and United’s Best-Response Curves
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28. Figure 13.4a Duopoly Equilibria
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29. Figure 13.4b Duopoly Equilibria
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30. Table 13.3 Cournot Equilibrium Varies with the Number of Firms
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31. Figure 13.6 Stackelberg Equilibrium
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32. Table 13.5 Comparison of Airline Market Structures
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33. Figure 13.8 Monopolistically Competitive Equilibrium
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34. Figure 13.9 Monopolistic Competition Among Airlines
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