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Oligopoly BETWEEN MONOPOLY and PERFECT COMPETITION

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Oligopoly BETWEEN MONOPOLY and PERFECT COMPETITION Oligopoly 1 7 Copyright © 2011 Cengage Learning BETWEEN MONOPOLY AND PERFECT COMPETITION C Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly Copyright © 2011 Cengage Learning BETWEEN MONOPOLY AND PERFECT COMPETITION Imperfect competition includes industries in which C firms have competitors C but do not face so much competition that they are price takers. Copyright © 2011 Cengage Learning BETWEEN MONOPOLY AND PERFECT COMPETITION C Types of Imperfectly Competitive Markets C Oligopoly C Only a few sellers, each offering a similar or identical product to the others. C Monopolistic Competition C Many firms selling products that are similar but not identical. Copyright © 2011 Cengage Learning Figure 1 The Four Types of Market Structure Number of Firms? Many firms Type of Products? One Few Differentiated Identical firm firms products products Monopolistic Perfect Monopoly Oligopoly Competition Competition (Chapter 15) (Chapter 17) (Chapter 16) (Chapter 14) 8 Tap water 8 Chocolate 8 Novels 8 Wheat 8 Cable TV 8 Crude oil 8 Restaurants 8 Milk CopyrightCopyright©2010 © 2011 Cengage South-Western Learning MARKETS WITH ONLY A FEW SELLERS Because of the few sellers, the key feature of oligopoly is the tension between cooperation and self-interest. Copyright © 2011 Cengage Learning MARKETS WITH ONLY A FEW SELLERS C Characteristics of an Oligopoly Market C Few sellers offering similar or identical products C Interdependent firms C Firms are best off cooperating and acting like a monopolist - producing a small quantity of output and charging a price above marginal cost Copyright © 2011 Cengage Learning A Duopoly Example C A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly. Copyright © 2011 Cengage Learning Table 1 The Demand Schedule for Water Q P TotRev TotCost Profit 0 120 0 500 -500 P=120-Q 10 110 1100 500 600 TC=500 20 100 2000 500 1500 30 90 2700 500 2200 40 80 3200 500 2700 MC=0 50 70 3500 500 3000 60 60 3600 500 3100 Soc. eff. P=MC ! 70 50 3500 500 3000 80 40 3200 500 2700 90 30 2700 500 2200 P=0 & QE=120 100 20 2000 500 1500 110 10 1100 500 600 120 0 0 500 -500 Copyright©2011 South-Western C Price and Quantity Supplied C The price of water in a perfectly competitive market would be driven to where the marginal cost is zero: C P = MC = €0 C Q = 120 litres C The price and quantity in a MONOPOLY market would be where total profit is maximized: P=120-Q ! MR=120-2Q MC=0 ! and P = Q*= 60 litres €60 Copyright © 2011 Cengage Learning A Duopoly Example C Price and Quantity Supplied C The socially efficient quantity of water is 120 litres, but a monopolist would produce only 60 litres of water. C So what outcome then could be expected from duopolists? Copyright © 2011 Cengage Learning Competition, Monopolies, and Cartels C The duopolists may agree on a monopoly outcome. C Collusion C An agreement among firms in a market about quantities to produce or prices to charge. C Cartel C A group of firms acting in unison. Copyright © 2011 Cengage Learning Competition, Monopolies, and Cartels C Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. C Competition laws prohibit explicit agreements among oligopolists as a matter of public policy. C Cartels are not stable, they are not EQUILIBRIA … Copyright © 2011 Cengage Learning The Equilibrium for an Oligopoly A Nash equilibrium is a situation in which economic actors interacting with one another each choose their best strategy, GIVEN the strategies that all the others have chosen. Copyright © 2011 Cengage Learning The Equilibrium for a Duopoly C Two firms, A and B Q=xA+xB xA=30 and xB=30 P=120-Q ! is a Nash equilibrium? P=120-xA-30 ! max πA (xA |xB=30)! P=90-xA xA*=30 ??? MR=90-2xA MR=MC! 90-2xA=0 ! 30 ≠ xA=45 Copyright © 2011 Cengage Learning Equilibrium for an Oligopoly C Summary C Possible outcome if oligopoly firms each pursue their own self-interest: C Joint output is greater than the monopoly quantity but less than the competitive industry quantity. C Market prices are lower than monopoly price but greater than competitive price. C Total profits are less than the monopoly profit. Copyright © 2011 Cengage Learning PUBLIC POLICY TOWARD OLIGOPOLIES C Cooperation among oligopolists is undesirable from the standpoint of society as a whole because it leads to production that is too low and prices that are too high. Copyright © 2011 Cengage Learning Restraint of Trade and Competition Law C It is illegal to restrain trade or attempt to monopolize a market. C Articles 101 and 102 of the Treaty of Rome C The European Commission has a number of investigative powers to help it apply the EU anti- trust rules and may fine business undertakings that violate them Copyright © 2011 Cengage Learning Controversies over Competition Policy C Competition policies sometimes may prohibit business practices that have potentially positive effects: C Resale price maintenance C Predatory pricing C Tying Copyright © 2011 Cengage Learning Controversies over Competition Policy C Resale Price Maintenance C occurs when suppliers (like wholesalers) require retailers to charge a specific amount C Predatory Pricing C occurs when a large firm begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the market C Tying C when a firm offers two (or more) of its products together at a single price, rather than separately Copyright © 2011 Cengage Learning Summary C Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. C If oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. Copyright © 2011 Cengage Learning Summary C The prisoners dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. C The logic of the prisoners dilemma applies in many situations, including oligopolies. Copyright © 2011 Cengage Learning Summary C Policy makers use the antitrust laws to prevent oligopolies from engaging in behaviour that reduces competition. Copyright © 2011 Cengage Learning .
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