1. Oligopoly

2. Characteristics Few large firms dominate the market
Differentiated or homogenous product
Barriers to entry
Patents
Licenses
Resource control

3. Characteristics cont. Mutual interdependence
Each firm makes decisions based on what they believe the competition will do
Firms DO NOT compete based on prices

4. Examples Oil/gasoline (OPEC) Pharmaceuticals Automobiles Banking
Phones (cell and line)
Soda Industry

5. Cartel
Group of oligopoly firms who formally agree not to compete on the basis of price, production, etc.

6. Collusion Illegal agreement between sellers to cooperate on pricing
Firms realize competition holds them back so they agree to restrict supply in order to set higher prices

7. Game Theory

8. Example

9. Example 2

10. Example 3 Two firms Starbucks and Dunkin Donuts Both sell coffee
Both have introduced a new drink “Latte Macchiato” and have to decide if they will advertise or not advertise

11. Advertise
Not Advertise
$300, $200
$350, $65
$75, $350
$150, $100

12. Example 4 Two firms Ben and Jerry’s Both sell ice cream
Both have introduced a new dessert and have to decide how much to produce
High v Low production

13. Firm B's output
High output
Low output
Firm A's output
$5m, $5m
$12m, $4m
$4m, $12m
$10m, $10m