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OLIGOPOLY

OLIGOPOLY. Economics ~ Fall Semester ~ Mrs. Huff. Definition. A market structure in which only a FEW sellers offer similar or identical products. Indicated where the 4 top sellers of a product comprise at least 40% of the market share. Examples. What can you think of?.

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OLIGOPOLY

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  1. OLIGOPOLY Economics ~ Fall Semester ~ Mrs. Huff

  2. Definition • A market structure in which only a FEW sellers offer similar or identical products. • Indicated where the 4 top sellers of a product comprise at least 40% of the market share

  3. Examples • What can you think of? • Six movie studios receive 90 percent of American film revenues. • Four major music companies receive 80 percent of recording revenues.

  4. Market Share = 44%

  5. A former oligopoly. . . 4.6.2009

  6. Big 4 = 60.4% = OLIGOPOLY!

  7. KEY FEATURE • Tension between cooperation and self-interest. • Usually best off cooperating and therefore acting like a monopolist. • BUT • Because each firm cares only about its own profit, there are powerful incentives at work that usually hinder a group of firms from behaving like a monopoly.

  8. Duopoly • Oligopoly with only two members. • Or, a situation where two firms control the majority of the market share. • What examples can you think of? • Home Depot vs. Lowes • DirecTv vs. Dish Network • FedEx vs. UPS • Kleenex vs. Puffs

  9. Collusion • Takes place within an industry when rival companies cooperate for their mutual benefit. • Usually results in an agreement among firms in a market about quantities to produce or prices to charge. • Collusion most often takes place within the market structure of oligopoly, where the decision of a few firms to collude can significantly impact the market as a whole. • Explicit Collusion = Cartel • Collusion which is not overt = Tacit Collusion • Unwritten rules of collusive behavior. • Firms agree to play a certain strategy without explicitly saying so.

  10. Cartel • Formal (explicit) agreement among competing firms. • It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. • Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. • Examples? • OPEC – not subject to anti-trust legislation, protected by international law. • Illegal Drug Cartels? Economically, not cartels, but the name has stuck.

  11. Game Theory • Study of how people behave in strategic situations. • More specifically: Game theory attempts to mathematically capture behavior in strategic situations, or games, in which an individual's success in making choices depends on the choices of others. • What is meant by strategic? • A situation in which each person, when deciding what actions to take, must consider how others might respond to that action.

  12. The Game of “Chicken”

  13. More Chicken! • Let’s see how this plays out in the movies. . .

  14. Keep or Share? • Our own experiment. . . • Terms: • Share – Share = Share the prize at 50-50. • Keep – Keep = Keep 0% of prize – prize distributed to audience. • Keep – Share = Keep keeps 100%, the share keeps 0%.

  15. The Prisoners’ Dilemma • Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal. If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full 20-year sentence. If both remain silent, both prisoners are sentenced to only 1 year in jail for a minor charge. If each betrays the other, each receives an 8-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. • How should the prisoners act?

  16. Bonnie’s Decision Clyde’s Decision Confess Remain Silent Bonnie gets 8 years. Bonnie gets 20 years. Confess Clyde gets 8 years. Clyde goes free. Bonnie goes free. Bonnie gets 1 year. Remain Silent Clyde gets 20 years. Clyde gets 1 year.

  17. It’s pretty psychological. . . • Trying to understand and explain why there is such tension between cooperation and pursuing self-interest gets very psychological. • BEHAVIORAL ECONOMICS!!

  18. NASH Equilibrium • John Forbes Nash ~ Brilliant Economist ~ Featured in the movie A Beautiful Mind. • Demonstrates the tension between cooperation and self-interest. • A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen. Omit 1:45-1:50

  19. Other applications of Game Theory?

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