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Chapter 14, Oligopoly

This document provides an overview of oligopoly market structures. It defines oligopoly as an industry with a small number of producers who have market power and engage in imperfect competition. The document discusses different forms of oligopoly, including duopoly, and ways that oligopolists may interact, such as collusion, cartels, cooperative vs non-cooperative behavior, and pricing strategies. It also introduces game theory and concepts like the prisoner's dilemma, Nash equilibrium, and how firms use strategies like pricing leadership, product differentiation, and tacit collusion.

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38 views10 pages

Chapter 14, Oligopoly

This document provides an overview of oligopoly market structures. It defines oligopoly as an industry with a small number of producers who have market power and engage in imperfect competition. The document discusses different forms of oligopoly, including duopoly, and ways that oligopolists may interact, such as collusion, cartels, cooperative vs non-cooperative behavior, and pricing strategies. It also introduces game theory and concepts like the prisoner's dilemma, Nash equilibrium, and how firms use strategies like pricing leadership, product differentiation, and tacit collusion.

Uploaded by

shabbirmia570
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

OLIGOPOLY Chapter 14

INTRODUCTION

An oligopoly is an industry with only a small number of producers.

A producer in such an industry is known as an oligopolist.

Economists refer to a situation in which firms compete but also


possess market power—which enables them to affect market
prices—as imperfect competition.

There are actually two important forms of imperfect competition:


oligopoly and monopolistic competition.
UNDERSTANDING OLIGOPOLY

 An oligopoly consisting of only two firms is a duopoly.

 Each firm is known as a duopolist.

 Sellers engage in collusion when they cooperate to raise


their joint profits.

 A car tel is an agreement among several producers to


obey output restrictions in order to increase their joint
profits.

 When firms ignore the effects of their actions on each


others’ profits, they engage in noncooperative behavior.
GAMES OLIGOPOLISTS PLAY

 When a firm’s decision significantly aff ects the profits of


other firms in the industry, the firms are in a situation of
interdependence.

 The study of behavior in situations of interdependence is


known as game theor y.

 The reward received by a player in a game, such as the profit


ear ned by an oligopolist, is that player’s payoff.

 A payoff matr ix shows how the payoff to each of the


participants in a two - player game depends on the actions of
both. Such a matrix helps us analyze situations of
interdependence.
GAME THEORY
THE PRISONERS’ DILEMMA
 Game theory deals with any situation in which the reward
to any one player—the payoff—depends not only on his or
her own actions but also on those of other players in the
game.

 In the case of oligopolistic fir ms, the payoff is simply


the fir m’s profit.

 Prisoners’ dilemma is a game based on two premises:


(1) Each player has an incentive to choose an action that
benefits itself at the other player’s expense.
(2) When both players act in this way, both are worse off
than if they had acted cooperatively.
THE PRISONERS’ DILEMMA
GAME THEORY

 A Nash equilibr ium , also known as a noncooperative


equilibr ium, results when each player in a game chooses the
action that maximizes his or her payoff given the actions of other
players, ignor ing the eff ects of his or her action on the payoffs
received by those other players.

 A firm engages in strategic behavior when it attempts to


influence the future behavior of other firms.

 An action is a dominant strategy when it is a player’s best action


regardless of the action taken by the other player.\

 A strategy of tit for tat involves playing cooperatively at first, then


doing whatever the other player did in the previous per iod.

 When firms limit production and raise pr ices in a way that raises
one anothers’ profits, even though they have not made any f ormal
agreement, they are engaged in tacit collusion.
GAME THEORY

How Repeated Interaction Can Support Collusion


GAME THEORY

 A pr ice war occurs when tacit collusion breaks down and


prices collapse.

 Product differentiation is an attempt by a firm to


convince buyers that its product is different from the
products of other firms in the industry.

 In pr ice leadership, one firm sets its price first, and other
firms then follow.

 Firms that have a tacit understanding not to compete on


price often engage in intense nonpr ice competition,
using advertising and other means to try to increase their
sales.
OLIGOPOLY EXAMPLES

Automobile Industry

Technology Industry

Media Industry

Pharmaceutical Industry

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