1、Copyright2004 South-WesternOligopoly(Principles of Economics,Chapter 17)Copyright 2004 South-WesternBETWEEN MONOPOLY AND PERFECT COMPETITION Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.Copyright 2004 South-WesternBETWEEN MONOPOLY AN
2、D PERFECT COMPETITION Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.Copyright 2004 South-WesternBETWEEN MONOPOLY AND PERFECT COMPETITION Types of Imperfectly Competitive Markets Oligopoly Only a few sellers,ea
3、ch offering a similar or identical product to the others.Monopolistic Competition Many firms selling products that are similar but not identical.Figure 1 The Four Types of Market StructureCopyright 2004 South-Western Tap water Cable TVMonopoly(Chapter 15)Novels MoviesMonopolisticCompetition(Chapter
4、17)Tennis balls Crude oilOligopoly(Chapter 16)Number of Firms?Perfect Wheat MilkCompetition(Chapter 14)Type of Products?IdenticalproductsDifferentiatedproductsOnefirmFewfirmsManyfirmsCopyright 2004 South-WesternMARKETS WITH ONLY A FEW SELLERS Because of the few sellers,the key feature of oligopoly i
5、s the tension between cooperation and self-interest.Copyright 2004 South-WesternMARKETS WITH ONLY A FEW SELLERS Characteristics of an Oligopoly Market Few sellers offering similar or identical products Interdependent firms Best off cooperating and acting like a monopolist by producing a small quanti
6、ty of output and charging a price above marginal costCopyright 2004 South-WesternA Duopoly Example A duopoly is an oligopoly with only two members.It is the simplest type of oligopoly.Table 1 The Demand Schedule for WaterCopyright 2004 South-WesternCopyright 2004 South-WesternA Duopoly Example Price
7、 and Quantity Supplied The price of water in a perfectly competitive market would be driven to where the marginal cost is zero:P=MC=$0 Q=120 gallons The price and quantity in a monopoly market would be where total profit is maximized:P=$60 Q=60 gallonsCopyright 2004 South-WesternA Duopoly Example Pr
8、ice 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?Copyright 2004 South-WesternCompetition,Monopolies,and Cartels The duopolists may agree on a monopoly outco
9、me.Collusion An agreement among firms in a market about quantities to produce or prices to charge.Cartel A group of firms acting in unison.Copyright 2004 South-WesternCompetition,Monopolies,and Cartels Although oligopolists would like to form cartels and earn monopoly profits,often that is not possi
10、ble.Antitrust laws prohibit explicit agreements among oligopolists as a matter of public policy.Copyright 2004 South-WesternThe 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 th
11、at all the others have chosen.Copyright 2004 South-WesternThe 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.Copyrigh
12、t 2004 South-WesternThe Equilibrium for an Oligopoly The oligopoly price is less than the monopoly price but greater than the competitive price(which equals marginal cost).Copyright 2004 South-WesternEquilibrium for an Oligopoly Summary Possible outcome if oligopoly firms pursue their own self-inter
13、ests:Joint output is greater than the monopoly quantity but less than the competitive industry quantity.Market prices are lower than monopoly price but greater than competitive price.Total profits are less than the monopoly profit.Table 1 The Demand Schedule for WaterCopyright 2004 South-WesternCopy
14、right 2004 South-WesternHow the Size of an Oligopoly Affects the Market Outcome How increasing the number of sellers affects the price and quantity:The output effect:Because price is above marginal cost,selling more at the going price raises profits.The price effect:Raising production will increase
15、the amount sold,which will lower the price and the profit per unit on all units sold.Copyright 2004 South-WesternHow the Size of an Oligopoly Affects the Market Outcome As the number of sellers in an oligopoly grows larger,an oligopolistic market looks more and more like a competitive market.The pri
16、ce approaches marginal cost,and the quantity produced approaches the socially efficient level.Copyright 2004 South-WesternGAME 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
17、what actions to take,must consider how others might respond to that action.Copyright 2004 South-WesternGAME 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
18、 much it produces but also on how much the other firms produce.Copyright 2004 South-WesternThe Prisoners Dilemma The prisoners dilemma provides insight into the difficulty in maintaining cooperation.Often people(firms)fail to cooperate with one another even when cooperation would make them better of
19、f.Copyright 2004 South-WesternThe 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.Figure 2 The Prisoners DilemmaCopyright2003 Southwestern/Thomson LearningBonnie
20、s DecisionConfessConfessBonnie gets 8 yearsClyde gets 8 yearsBonnie gets 20 yearsClyde goes freeBonnie goes freeClyde gets 20 yearsgets 1 yearBonnie Clyde gets 1 yearRemain SilentRemainSilentClydesDecisionCopyright 2004 South-WesternThe Prisoners Dilemma The dominant strategy is the best strategy fo
21、r a player to follow regardless of the strategies chosen by the other players.Copyright 2004 South-WesternThe Prisoners Dilemma Cooperation is difficult to maintain,because cooperation is not in the best interest of the individual player.Figure 3 An Oligopoly GameCopyright2003 Southwestern/Thomson L
22、earningIraqs DecisionHigh ProductionHigh ProductionIraq gets$40 billionIran gets$40 billionIraq gets$30 billionIran gets$60 billionIraq gets$60 billionIran gets$30 billionIraq gets$50 billionIran gets$50 billionLow ProductionLowProductionIransDecisionCopyright 2004 South-WesternOligopolies as a Pris
23、oners Dilemma Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production,high prices,and monopoly profits.Figure 4 An Arms-Race GameCopyright2003 Southwestern/Thomson LearningDecision of the United States(U.S.)ArmArmU.S.at riskUSSR at riskU.S.at risk and
24、 weakUSSR safe and powerfulU.S.safe and powerfulUSSR at risk and weakU.S.safeUSSR safeDisarmDisarmDecision of the Soviet Union(USSR)Figure 5 An Advertising GameCopyright2003 Southwestern/Thomson LearningMarlboro s Decision AdvertiseAdvertiseMarlboro gets$3billion profitCamel gets$3billion profitCame
25、l gets$5billion profitMarlboro gets$2billion profitCamel gets$2billion profitMarlboro gets$5billion profitCamel gets$4billion profitMarlboro gets$4billion profitDont AdvertiseDontAdvertiseCamelsDecisionFigure 6 A Common-Resource GameCopyright2003 Southwestern/Thomson LearningExxons Decision Drill Tw
26、oWellsDrill Two WellsExxon gets$4million profitTexaco gets$4million profitTexaco gets$6million profitExxon gets$3million profitTexaco gets$3million profitExxon gets$6million profitTexaco gets$5million profitExxon gets$5million profitDrill One WellDrill OneWellTexacosDecisionCopyright 2004 South-West
27、ernWhy 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.Figure 7 Jack and Jill Oligopoly GameCopyright2003 Southwestern/Thomson LearningJacks Decision Sell 40GallonsSell 40 GallonsJack ge
28、ts$1,600 profitJill gets$1,600 profitJill gets$2,000 profitJack gets$1,500 profitJill gets$1,500 profitJack gets$2,000 profitJill gets$1,800 profitJack gets$1,800 profitSell 30 GallonsSell 30GallonsJillsDecisionCopyright 2004 South-WesternPUBLIC POLICY TOWARD OLIGOPOLIES Cooperation among oligopolis
29、ts 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.Copyright 2004 South-WesternRestraint of Trade and the Antitrust Laws Antitrust laws make it illegal to restrain trade or attempt to monopolize a market.Sherman Ant
30、itrust Act of 1890 Clayton Act of 1914Copyright 2004 South-WesternControversies over Antitrust Policy Antitrust policies sometimes may not allow business practices that have potentially positive effects:Resale price maintenance Predatory pricing Tying Copyright 2004 South-WesternControversies over A
31、ntitrust Policy 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 when a f
32、irm offers two(or more)of its products together at a single price,rather than separatelyCopyright 2004 South-WesternSummary Oligopolists maximize their total profits by forming a cartel and acting like a monopolist.If oligopolists make decisions about production levels individually,the result is a g
33、reater quantity and a lower price than under the monopoly outcome.Copyright 2004 South-WesternSummary The prisoners dilemma shows that self-interest can prevent people from maintaining cooperation,even when cooperation is in their mutual self-interest.The logic of the prisoners dilemma applies in many situations,including oligopolies.Copyright 2004 South-WesternSummary Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition.
