principles of microeconomics : ch.16 second canadian edition chapter 16 oligopoly © 2002 by nelson,...

Principles of Microeconomics : Ch.16 Second Canadian Edition

Chapter 16

Oligopoly

© 2002 by Nelson, a division of Thomson Canada Limited


Overview

Between Monopoly & Perfect Competition

Markets with only a Few Sellers

Game Theory and OligopolyPublic Policy


The Spectrum of Market Structure



PureCompetition



PureCompetition

PureMonopoly



PureCompetition

PureMonopoly

ImperfectCompetition


Imperfect Competition is...

…market structures that fall between perfect competition and pure monopoly.

Characteristic of:– Industries in which the firms have

competitors but. . . do not face so much competition that the firm is a price-taker.


Imperfect Competition

Two types of imperfectly competitive markets:

Monopolistic CompetitionMany firms selling products that are similar

but not identical (e.g. movies.)Oligopoly

Only a few sellers, each offering a similar or identical product to the others (e.g. hockey skates.)


Overview





Markets with only a Few Sellers: Oligopoly

Because of the few sellers, the actions of any one seller in the market can have a large impact on the profits

of all the other sellers.


Markets with only a Few Sellers: Oligopoly

Characteristics of an Oligopoly Market:– Few sellers offering similar product

– Interdependent on other firms in industry

– Best off by co-operating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost

Duopoly Example. . .


Lessons From Duopoly Example

A duopoly (and oligopoly) market structure may result in:Collusion: The two firms (industry)

agreeing on the quantity to produce and the market price to charge.

Cartel: The two firms (industry) joining together and acting in unison.In effect, the actions may result in the

market being served by a monopoly.


A Non-Collusive Duopoly (Oligopoly)

Oligopolies pursuing their own self-interest, but acting independently.

Production is greater than the monopoly quantity but less than the competitive industry quantity.

Market prices are lower than monopoly but greater than competitive price (marginal cost.)

Total profits are less than the monopoly profit.


Oligopoly Size and Market Outcome

As the size of an oligopoly increases, production will increase (i.e. the output effect) maintaining price above marginal cost.

As the number of sellers in an oligopoly grows larger, the market is more similar to a competitive market. – Price approaches marginal cost and

output is more socially efficient.


Quick Quiz! If the members of an

oligopoly could agree on a total quantity to produce, what quantity would they choose?

If oligopolies do not act together, do they produce a total quantity more or less than the previous question?


Overview





Game Theory & The Economics of Co-operation

Game Theory: the study of how people behave in strategic situations. – A strategic decision is one in which each

person (or firm), in deciding what actions to take, carefully considers how others (or other firms) might respond to that action.

– Since there are just a few large firms in an oligopoly market, each firm must make strategic decisions.


Game Theory & The Economics of Co-operation

Prisoners’ Dilemma: illustrates the difficulty in maintaining co-operation. – Often people (firms) fail to co-operate

with one another even when co-operation would make them better off.

The Prisoners’ Dilemma Story:– Bonnie and Clyde Example


The Prisoners’ DilemmaPerson #1 Decision

Choice # 1 Choice # 2

Per

son

# 2

Dec

isio

n

Ch

oic

e #

2C

ho

ice

# 1

Payoff1,1

Payoff2,1

Payoff1,2

Payoff2,2


The Prisoners’ DilemmaDominant Strategy: The best strategy

for a player to follow regardless of the strategies pursued by other players. – Co-operation is difficult to maintain,

because co-operation is not in the best interest of the individual.

– Self-interest makes it difficult for the oligopoly to maintain the co-operative outcome with low production, high prices and monopoly profits.


Oligopolies and Prisoners’ DilemmaSelf-interest makes it difficult for the

oligopoly to maintain the co-operative outcome with low production, high prices and monopoly profits.

May lead to cartel cheating.Examples:

– Iran and Iraq– International arms race– Beer Advertising


Overview





Public Policy Toward OligopoliesFirms in oligopolies have a strong incentive

to collude in order to:– reduce production– raise prices– increase profits“People in the same trade seldom meet together... but the conversation ends in a conspiracy against the public, or in some [diversion] to raise prices.”

(Adam Smith, 1776)


Public Policy Toward Oligopolies

From the standpoint of society, co-

operation among oligopolists is

undesirable because– it leads to production

that is too low– prices that are too high


Public Policy Toward OligopoliesCompetition Act:Makes it illegal to

restrain trade or attempt to monopolize a market.

Consists of: – criminal provisions– civil provisions


Competition Act

Criminal provisions include:

–Price Fixing, Rigging Bids

–Resale Price Maintenance

–Price Discrimination

–Predatory Pricing Civil provisions include mergers

which may not be in the public interest.


Controversies over Competition Policy

Sometimes the Competition Policies may not allow business practices that have potentially positive effects:

–Resale Price Maintenance

–Tying Examples...


Quick Quiz!

What kind of agreement is illegal for businesses to make?

Why are the competition laws controversial?


Conclusion

An oligopoly may end up looking more like a monopoly or a competitive market, depending on how many firms there are.

Oligopolies can attempt to co-operate with each other but are limited by laws.

Competition laws are used to regulate the behaviour of oligopolies.


Overview




principles of microeconomics : ch.16 second canadian edition chapter 16 oligopoly © 2002 by nelson,...

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