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Ch. 16 Oligopoly.

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Presentation on theme: "Ch. 16 Oligopoly."— Presentation transcript:

1 Ch. 16 Oligopoly

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

3 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

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

5 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

6 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

7 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

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

9 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


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