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Oligopoly

Oligopoly. Alexa Hartmayer. Key Concepts. A market Situation in which there are very few sellers. Each seller knows that the other sellers will react to its changes in prices and quantities. - Economics Today (pg 619). Characteristics. Small Number of Firms

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Oligopoly

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  1. Oligopoly Alexa Hartmayer

  2. Key Concepts A market Situation in which there are very few sellers. Each seller knows that the other sellers will react to its changes in prices and quantities. - Economics Today (pg 619)

  3. Characteristics • Small Number of Firms • Homogeneous or Differentiated products • Homogeneous: Cement, Zinc, Copper • Differentiated: Automobiles, Greeting Cards • Interdependent: Every individual firm must consider the actions of other firms • Strategic Dependence: When one firm counters another’s price, quality, advertising, to ensure the firms welfare

  4. Causes of Oligopolies (1) • Economies of Scale: • Firms total cost curve will slope downward as more outputs are produced. Average total cost will be reduced as firms expand the scale of their operation. • Smaller firms will have a tendency to be inefficient (ATC greater than large firms). They are either absorbed or go out of business.

  5. Causes of Oligopolies (2) • Barriers to Entry: Difficult to Enter • Legal Barriers (patents) • Control over Resources • Cartels (OPEC) • Collusion (illegal in United States)

  6. Causes of Oligopolies (3) • Mergers: Joining of two or more firms under single ownership and control • Horizontal Merger: Joining of firms that are producing or selling a similar product • Vertical Merger: Joining of a firm with another to which it sells an output or from which it buys an input

  7. Game Theory • Analytical framework in which two or more individuals, companies, or nation compete for certain payoffs that depend on the strategy that others employ • Low Price/High Price=Winner and Loser • Low Price/Low Price=Winner and Winner • High Price/High Price=Big Winner and Big Winner • Collusion (illegal in US) • Nash Equilibrium: When the strategies of all the player are optimum (self enforcing)

  8. Kinked Demand Curve • Price inflexibility • Above P1 is relatively elastic • Below P1 is relatively inelastic • MC=MR is profit maximization

  9. Losses & Profits

  10. Breaking Even

  11. Comparing Market Structures • Refer to page 633 in textbook

  12. Oligopoly Question (1) (E)- The strategy for Bright is fully dependant on Sparkle’s strategy, and Sparkle’s dominant strategy is strategy 1

  13. (2) • Produces the Best results for every possible action the other participants take • Firms will try to maximize their profits by picking their dominant strategy, or by watching the other firms dominant strategy

  14. (3) • Interdependence in an industry. • Game theory is a way of describing the various outcomes in any situation involving two or more competing firms.

  15. Answers to Free Response • Mutual Interdependence, the behavior of one firm affects the other. • Evening Departure would be the best strategy. • Morning Departure is dominant for Windward. • Choosing an evening strategy is not dominant. Airtouch does not have a dominant strategy because its best payoff depends on Windwards strategy. • $700 will be Windwards daily profit.

  16. Ode to the Oligopoly They rise from ashes of enemies past; the truest gluttons any shall see. Consuming the horizon, the zenith of humanities sullen world. Asking in voices of sinister mirth “Shall we play a game?” Failing to follow in suite will lead to loss Yet complying without a care Will cause lady of law to weigh her scales Laying your avarice bare to blinded eyes

  17. Real World Links • http://www.torontosun.com/money/2011/01/19/16951226.html • http://www.dofonline.co.uk/content/view/5080/152/

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