1. Oligopoly Few sellers each offering a similar or identical product to the others Some barriers to entry into the market Because of few sellers, oligopoly is the tension between cooperation and self-interest. Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists as a matter of public policy. Duopoly is an oligopoly with only two members. Perfect Competition: MC=$0, P=$0 and Q=120 Game Theory: the study of how people behave in strategic situations. Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action. prisoners’ dilemma: a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial. Dominant Strategy: the best strategy for a player to follow regardless of the strategies chosen by the other players. Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player. Imperfect competition - market structures that fall between perfect competition and pure monopoly. Demand for Water Monopoly: MC=$0, P=$60 and Q=60 Oligopoly: When firms 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. Oligopoly price is less than the monopoly price but greater than the competitive price Oligpolists may agree on a monopoly outcome. Collusion - An agreement among firms in a market about quantities to produce or prices to charge. Cartel - A group of firms acting in unison Price Matching, Sale-Price Guarantee, Price Leadership, Explicit Price-Fixing Agreements, Public Pricing Resale Price Maintenance - occurs when suppliers (like wholesalers) require retailers to charge a specific amount Tying - when a firm offers two (or more) of its products together at a single price, rather than separately Predatory Pricing - occurs when firms begin to cut the price with the intent of driving its competitor(s) out of the market Tacit Collusion - cooperation amony rival firms that does not involve any explicit agreement (IGA – Houchens town) 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. PriceQuantity Total Revenue $1200$0 $11010$1,100 $10020$2,000 $9030$2,700 $8040$3,200 $7050$3,500 $6060$3,600 $5070$3,500 $4080$3,200 $3090$2,700 $20100$2,000 $10110$1,100 $0120$0 Limited price maker Interdependent firms Sherman Antitrust Act of 1890Clayton Act of 1914Federal Trade Commission Act of 1914U. S. Justice Department Nash Equilibrium: firms interacting with one another each choose their best strategy given the strategies that all other firms have chosen. Copyright eStudy.us 2010 michael.roberson@eStudy.us