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Oligopoly These SIX movie studios own 90% of the movie market!

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Presentation on theme: "Oligopoly These SIX movie studios own 90% of the movie market!"— Presentation transcript:

1 Oligopoly These SIX movie studios own 90% of the movie market!

2 What is so unique about the firms in an oligopoly market structure?

3 Oligopoly Characteristics of an oligopoly market – Few sellers offering similar or identical products – Interdependent firms React to competitors actions

4 GAME THEORY Game theory is the study of how people behave in strategic situations. Oligopolies are constantly playing a “game” with their competitors….

5 Let’s play a little game theory…

6 Game Theory: Cheating Students I believe that you both have vandalized the school. You have two options – You can remain silent and I can issue you a 1 hour detention – You can confess and implicate your partner, you will be granted immunity and your partner will get a 4 hour Saturday School – If both confess, that will save me the trouble of gathering evidence so you both will get a 2 hour detention

7 Game Theory: Vandalizing Students Student B Decision Confess Student B gets 2 hour Student A gets 2 hour Student B gets 4 hour Sat. Student A goes free Student B goes free Student A get 4 hour Sat. Go free Remain Silent Student A Decision

8 Oligopolies and Game Theory Each firm has an incentive to cheat to benefit at the other firm’s expense When both firms cheat, both are worse off then they would have been if neither cheated

9 Pepsi and Coke Game Theory What’s Coca Cola’s best decision? What’s Pepsi’s best decision? What is the decision that will ultimately be made? (The Nash Equilibrium)

10 Pepsi and Coke’s Payoff Matrix Coke’s Decision High Production High Production: 40 Gal. Coke gets $1,600 profit Pepsi gets $1,600 profit Coke gets $1,500 profit Pepsi gets $2,000 profit Coke gets $2,000 profit Pepsi gets $1,500 profit Coke gets $1,800 profit Pepsi gets $1,800 profit Low Production: 30 gal. Low Production Pepsi’s Decision 40 gal. 30 gal.

11 Collusion  Agreement among producers to divide market, set prices, or limit production  Illegal in the United States (antitrust laws)

12 Cartels ○ Formal organization of producers that act in unison after a collusion agreement ○ Illegal in the United States

13 An Arms-Race Game Decision of the United States (U.S.) Arm U.S. at risk USSR at risk U.S. at risk and weak USSR safe and powerful U.S. safe and powerful USSR at risk and weak U.S. safe USSR safe Disarm Decision of the Soviet Union (USSR)

14 How 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 price approaches marginal cost, and the quantity produced approaches the socially efficient level.


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