Ch. 16 Oligopoly

Oligopoly Only a few sellers offer similar or identical products Actions of any seller can have large impact on profits of other sellers

Game Theory Study of how people behave in strategic situations Each firm has to act strategically – tension between cooperation and self-interest Group of oligopolists better off cooperating and acting like a monopolist, but there is also incentive to act on its own

Duopoly Oligopoly with only two members Collusion – agreement among firms in a market about production and pricing Cartel – Group of firms acting in unison

Equilibrium for Oligopoly Look at case of perfect comp. vs. monopoly; oligopoly in middle Where would they maximize profit if allowed to collude? Nash Equilibrium – when economic actors interact with one another and choose their best strategy given the strategy of others

Equilibrium for Oligopoly Would be better off cooperating and reaching monopoly outcome Instead, they pursue self-interest and end up at point where total production rises and price falls from monopolistic outcome Still fall short of competitive firms’ output level and at a higher price

Size of an Oligopoly As # of firms in oligopoly market increases, the output moves toward competitive outcome Output effect vs. Price effect Price will approach MC; Q will approach socially efficient level

Economics of Cooperation Prisoners’ Dilemma: “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Prisoners’ Dilemma Payoff Matrix shows decisionmaking possibilities Dominant Strategy: strategy that is best for a player in a game regardless of the strategies chosen by the other players