KRUGMAN'S MICROECONOMICS for AP* Introduction to Oligopoly Margaret Ray and David Anderson Micro: Econ: Module

What you will learn in this Module : Why oligopolists have an incentive to act in ways that reduce their combined profit. Why oligopolies can benefit from collusion.

Understanding Oligopoly “Few” producers Remember HHI InterdependenceInterdependence

Collusion and Competition Oligopoly firms can increase their profits by colluding to restrict output or raise price. Maintaining collusive agreements is difficult because there is an incentive to cheat Collusion is illegal

Price versus Quantity Competition Bertrand Price competition Competitive outcome Cournot Quantity competition Economic profits

Price versus Quantity Competition Joseph Bertrand ( ) showed that when firms are selling an identical product, oligopolists will repeatedly lower price to undercut the competition. This process ends at the perfectly competitive outcome where P=MC.Joseph Bertrand ( ) showed that when firms are selling an identical product, oligopolists will repeatedly lower price to undercut the competition. This process ends at the perfectly competitive outcome where P=MC. Augustin Cournot ( ) focused on quantity competition, rather than price competition. Again assuming a homogenous product, duopoly firms choose output to maximize profit, given the output of the rival firm. There exists an equilibrium level of output that allows each firm to earn profits that are below monopoly-level profits, but are above normal profits.Augustin Cournot ( ) focused on quantity competition, rather than price competition. Again assuming a homogenous product, duopoly firms choose output to maximize profit, given the output of the rival firm. There exists an equilibrium level of output that allows each firm to earn profits that are below monopoly-level profits, but are above normal profits.

Table 64.1 Demand Schedule for Lysine Ray and Anderson: Krugman’s Economics for AP, First Edition Copyright © 2011 by Worth Publishers