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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.

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Presentation on theme: "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."— Presentation transcript:

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

4 Causes of Oligopolies (1) Economies of Scale: 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.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.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 Barriers to Entry: Difficult to Enter Legal Barriers (patents)Legal Barriers (patents) Control over ResourcesControl over Resources Cartels (OPEC)Cartels (OPEC) Collusion (illegal in United States)Collusion (illegal in United States)

6 Causes of Oligopolies (3) Mergers: Joining of two or more firms under single ownership and control Mergers: Joining of two or more firms under single ownership and control Horizontal Merger: Joining of firms that are producing or selling a similar productHorizontal 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 inputVertical 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 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 LoserLow Price/High Price=Winner and Loser Low Price/Low Price=Winner and WinnerLow Price/Low Price=Winner and Winner High Price/High Price=Big Winner and Big WinnerHigh Price/High Price=Big Winner and Big Winner Collusion (illegal in US) Collusion (illegal in US) Nash Equilibrium: When the strategies of all the player are optimum (self enforcing) Nash Equilibrium: When the strategies of all the player are optimum (self enforcing)

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

10 Losses & Profits

11 Breaking Even

12 Comparing Market Structures Refer to page 633 in textbook Refer to page 633 in textbook

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

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

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

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

18 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

19 Real World Links 1. /2011/01/19/ html /2011/01/19/ html /2011/01/19/ html 2. /view/5080/152/ /view/5080/152/ /view/5080/152/


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