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In this chapter, look for the answers to these questions: What market structures lie between perfect
competition and monopoly, and what are their characteristics?
What outcomes are possible under oligopoly? Why is it difficult for oligopoly firms to cooperate? How are antitrust laws used to foster competition?
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OLIGOPOLY
One firm
Few firms
Differentiated products
Identical products
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OLIGOPOLY
Q 140
130 120 110 100 90 80 70 60 50
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OLIGOPOLY
Q
140 130 120 110
Revenue
650 1,200 1,650
Cost
1,300 1,200 1,100
Profit
650 0 550
$0 $1,400 1,400
20
25 30 35 40 45
100
90 80 70 60 50
2,000
2,250 2,400 2,450 2,400 2,250
OLIGOPOLY
1,000
900 800 700 600 500
1,000
1,350 1,600 1,750 1,800 1,750
CHAPTER 16
Q
140 130 120 110 100 90 80 70 60 50
Duopoly outcome with collusion: Each firm agrees to produce Q = 30, earns profit = $900. If Cingular reneges on the agreement and produces Q = 40, what happens to the market price? Cingulars profits? Is it in Cingulars interest to renege on the agreement? If both firms renege and produce Q = 40, determine each firms profits.
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ACTIVE LEARNING
Answers
P
$0 5 10 15 20 25 30 35 40 45
1:
Q
140 130 120 110 100 90 80 70 60 50
If both firms stick to agreement, each firms profit = $900 If Cingular reneges on agreement and produces Q = 40: Market quantity = 70, P = $35 Cingulars profit = 40 x ($35 10) = $1000 Cingulars profits are higher if it reneges.
Verizon will conclude the same, so both firms renege, each produces Q = 40: Market quantity = 80, P = $30 Each firms profit = 40 x ($30 10) = $800
Lesson:
It is difficult for oligopoly firms to form cartels and honor their agreements.
CHAPTER 16
OLIGOPOLY
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Q
140 130 120 110 100 90 80 70 60 50
If each firm produces Q = 40, market quantity = 80 P = $30 each firms profit = $800
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ACTIVE LEARNING
Answers
P
$0 5 10 15 20 25 30 35 40 45
2:
Q
140 130 120 110 100 90 80 70 60 50
If each firm produces Q = 40, then each firms profit = $800. If Cingular increases output to Q = 50: Market quantity = 90, P = $25 Cingulars profit = 50 x ($25 10) = $750 Cingulars profits are higher at Q = 40 than at Q = 50. The same is true for Verizon.
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CHAPTER 16
OLIGOPOLY
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output effect:
If P > MC, selling more output raises profits. price effect: Raising production increases market quantity, which reduces market price and reduces profit on all units sold. the firm increases production.
the price effect becomes smaller the oligopoly looks more and more like a
competitive market P approaches MC the market quantity approaches the socially efficient quantity
Another benefit of international trade: Trade increases the number of firms competing, increases Q, keeps P closer to marginal cost
CHAPTER 16 OLIGOPOLY
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Game Theory
Game theory: the study of how people behave
in strategic situations
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OLIGOPOLY
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If you confess and implicate your partner, you go free. If you do not confess but your partner implicates you, you get 20 years in prison. If you both confess, each gets 8 years in prison.
OLIGOPOLY
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CHAPTER 16
Remain silent
Bonnie gets 20 years Clyde goes free
Bonnie gets 1 year Clyde gets 1 year
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OLIGOPOLY
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OLIGOPOLY
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Q = 40
Cingulars profit = $1000 Verizons profit = $750
Cingulars profit = $800 Verizons profit = $800
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Q = 30 Verizon Q = 40
CHAPTER 16
OLIGOPOLY
ACTIVE LEARNING
Answers
3:
American Airlines
Cut fares
Cut fares
United Airlines Dont cut fares
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OLIGOPOLY
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OLIGOPOLY
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OLIGOPOLY
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2. Predatory Pricing
3. Tying
CONCLUSION
Oligopolies can end up looking like monopolies
or like competitive markets, depending on the number of firms and how cooperative they are.
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OLIGOPOLY
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OLIGOPOLY
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OLIGOPOLY
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