ECN 3100

1. ECN 3100 Chapter 16 - Oligopoly Chapter 16

2. Oligopoly • “Only a few sellers, each offering a similar or identical product.” • Oligopolists: • Interdependent firms • Cooperates & acts like a monopolist • Producing small Q output • Charging P above MC • Collusion - An agreement among firms in a market about quantities to produce or prices to charge. • Cartel - A group of firms acting in unison. Chapter 16

3. “an oligopoly with only two members” Oligopoly - Duopoly Jack & Jill own wells and supply water to town folks at MC = AC = TC = 0 (no cost). If the demand for water is 120, how many gallons of water should each of them supply? P • A monopoly • produces at Qm where TRmax • A PC market • produces at Qp where P = MC = 0 Pm = 60 D Q Qm = 60 Qp = 120 Jack & Jill will form a cartel and agree upon a collusion to produce 60 gallons @ $60. Chapter 16

4. Oligopoly – Nash Equilibrium But Anti-trust Law does not allow explicit agreements between oligopolists. Nash equilibrium “a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen” Game theory “how people behave in strategic situations - deciding what actions to take and considering how others might respond to that action” Chapter 16

5. Oligopoly – Game Theory • Firms behave in strategic situations • Decide what actions to take • Consider how others might respond to that action • Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits. • The dominant strategyis the best strategy for a player to follow regardless of the strategies chosen by the other players. Chapter 16

6. Oligopoly – Prisoners’ Dilemma Bonnie & Clyde are both suspected of bank robbery, carrying a total of 8 years jail term. When asked individually, each are offered immunity if he/she confesses to the crime when the other does not. Otherwise, if both deny accusation, then both will serve 1 year for illegal gun possession. The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. Chapter 16

7. Oligopoly – Oil Clash Cooperation among oligopolists is undesirable from the standpoint of society as a whole because it leads to production that is too low and prices that are too high. Chapter 16

8. Oligopoly – Game Theory • Firms behave in strategic situations • Decide what actions to take • Consider how others might respond to that action • Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits. • The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players. • The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. • Cooperation among oligopolists is undesirable from the standpoint of society as a whole because it leads to production that is too low and prices that are too high. Chapter 16

9. Oligopoly –Controversies over Antitrust Policy Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. However … • Resale Price Maintenance (or fair trade) – occurs when suppliers (like wholesalers) require retailers to charge a specific amount • Predatory Pricing – occurs when a large firm begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the market • Tying – occurs when a firm offers two (or more) of its products together at a single price, rather than separately Chapter 16