oligopoly chapter 16. imperfect competition imperfect competition includes industries in which firms...
TRANSCRIPT
Oligopoly
Chapter 16
Imperfect Competition
Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.
Types of Imperfectly Competitive Markets
Oligopoly Only a few sellers, each offering a similar
or identical product to the others.
Monopolistic Competition Many firms selling products that are
similar but not identical.
Characteristics of an Oligopoly Market
Few sellers offering similar or identical products
Interdependent firms They are best off cooperating and acting
like a monopolist by producing a small quantity of output and charging a price above marginal cost.
Markets With Only a Few Sellers
Because of there being few sellers, the key features of oligopoly are the interdependence between firms and the resulting tension between cooperation and self-interest.
A Duopoly Example: Demand Schedule for Water
Quantity Price Total Revenue0 $120 $ 0
10 110 1,10020 100 2,00030 90 2,70040 80 3,20050 70 3,50060 60 3,60070 50 3,50080 40 3,20090 30 2,700
100 20 2,000110 10 1,100120 0 0
A Duopoly Example: Price andQuantity Supplied
The socially efficient quantity of water is 120 gallons, but a monopolist would produce only 60 gallons of water.
So what outcome then could be expected from duopolists?
Competition, Monopolies, and Cartels
The duopolists may agree on a monopoly outcome. Collusion
The two firms may agree on the quantity to produce and the price to charge.
Cartel The two firms may join together and act in
unison.
Jack’s TR, MR and profit given Jill’s expected output
market demand
Joint
decisions making
Case 1 Jill sells 30 units
Case 2 Jill sells 40 units
P
Q
TR
MR
Jack’s residual demand
Jack’s TR
Jack’s MR
Jack’s residual demand
Jack’s TR
Jack’s MR
120 0 0 0 0 0 0 110 10 1100 110 0 0 0 0 100 20 2000 90 0 0 0 0 90 30 2700 70 0 0 0 0 80 40 3200 50 10 800 80 0 0 70 50 3500 30 20 1400 60 10 700 70 60 60 3600 10 30 1800 40 20 1200 50 50 70 3500 -10 40 2000 20 30 1500 30 40 80 3200 -30 50 2000 0 40 1600 10 30 90 2700 -50 60 1800 -20 50 1500 -10 20 100 2000 -70 70 1400 -40 60 1200 -30 10 110 1100 -90 80 800 -60 70 700 -50 0 120 0 -110 90 0 -80 80 0 -70
To simplify the analysis, suppose that each producer must make ten unit increments in output produced.
Jill’s TR, MR and profit given Jill’s expected output
market demand
Joint
decisions making
Case 1 Jack sells 30 units
Case 2 Jack sells 40 units
P
Q
TR
MR
Jill’s residual demand
Jill’s TR
Jill’s MR
Jill’s residual demand
Jill’s TR
Jill’s MR
120 0 0 0 0 0 0 110 10 1100 110 0 0 0 0 100 20 2000 90 0 0 0 0 90 30 2700 70 0 0 0 0 80 40 3200 50 10 800 80 0 0 70 50 3500 30 20 1400 60 10 700 70 60 60 3600 10 30 1800 40 20 1200 50 50 70 3500 -10 40 2000 20 30 1500 30 40 80 3200 -30 50 2000 0 40 1600 10 30 90 2700 -50 60 1800 -20 50 1500 -10 20 100 2000 -70 70 1400 -40 60 1200 -30 10 110 1100 -90 80 800 -60 70 700 -50 0 120 0 -110 90 0 -80 80 0 -70
The Equilibrium for an Oligopoly
A Nash equilibrium is a situation in which economic actors, interacting with one another but making uncoordinated choices, each chooses its best strategy given the strategies that all the others have chosen.
In the above example, each producing 40 units is a Nash Equilibrium.
Pay-off matrix Jill’s quantity choice 40 units 30 units
40 units
$1,600 each
Jack $2,000 Jill $1,500
Jack’s quantity choice 30
units Jack $1,500 Jill $2,000
$1,800 each
This is an example of the prisoners’ dilemma; the individuals are unable to coordinate their decisions but the payoff each receives depends upon the choices made by both.
In general, game theory is the study of how people behave in strategic situations (i.e., situations in which decisionmakers must consider how others might respond.
Pay-off matrix Jill’s quantity choice 40 units 30 units
40 units
$1,600 each
Jack $2,000 Jill $1,500
Jack’s quantity choice 30
units Jack $1,500 Jill $2,000
$1,800 each
In this example, Jack and Jill each selling 40 units is the Nash equilibrium.
A dominant strategy is one that is best for a player in a game regardless of the strategies chosen by the other players.
Summary of Equilibrium for an Oligopoly
Possible outcome if oligopoly firms pursue their own self-interests: Joint output is greater than the monopoly
quantity but less than the competitive industry quantity.
Market prices are lower than monopoly price but greater than competitive price.
Total profits are less than the monopoly profit.
