Description
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers.
Oligopoly
16
Copyright©2004 South-Western
BETWEEN MONOPOLY AND PERFECT COMPETITION
• Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.
Copyright © 2004 South-Western
BETWEEN MONOPOLY AND PERFECT COMPETITION
• Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.
Copyright © 2004 South-Western
BETWEEN MONOPOLY AND PERFECT COMPETITION
• 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.
Copyright © 2004 South-Western
Figure 1 The Four Types of Market Structure
Number of Firms? Many firms Type of Products?
One firm
Few firms
Differentiated products
Identical products
Monopoly (Chapter 15)
• Tap water • Cable TV
Oligopoly (Chapter 16)
• Tennis balls • Crude oil
Monopolistic Competition (Chapter 17) • Novels • Movies
Perfect Competition (Chapter 14) • Wheat • Milk
Copyright © 2004 South-Western
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 © 2004 South-Western
MARKETS WITH ONLY A FEW SELLERS
• Characteristics of an Oligopoly Market
• Few sellers offering similar or identical products • Interdependent firms • Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost
Copyright © 2004 South-Western
A Duopoly Example
• A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.
Copyright © 2004 South-Western
Table 1 The Demand Schedule for Water
Copyright © 2004 South-Western
A Duopoly Example
• Price and Quantity Supplied
• The price of water in a perfectly competitive market would be driven to where the marginal cost is zero:
• P = MC = $0 • Q = 120 gallons
• The price and quantity in a monopoly market would be where total profit is maximized:
• P = $60 • Q = 60 gallons
Copyright © 2004 South-Western
A Duopoly Example
• Price and Quantity 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?
Copyright © 2004 South-Western
Competition, Monopolies, and Cartels
• The duopolists may agree on a monopoly outcome.
• Collusion
• An agreement among firms in a market about quantities to produce or prices to charge.
• Cartel
• A group of firms acting in unison.
Copyright © 2004 South-Western
Competition, Monopolies, and Cartels
• Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists as a matter of public policy.
Copyright © 2004 South-Western
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 © 2004 South-Western
The Equilibrium for an Oligopoly
• When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition.
Copyright © 2004 South-Western
The Equilibrium for an Oligopoly
• The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).
Copyright © 2004 South-Western
Equilibrium for an Oligopoly
• Summary
• 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.
Copyright © 2004 South-Western
Table 1 The Demand Schedule for Water
Copyright © 2004 South-Western
How the Size of an Oligopoly Affects the Market Outcome
• How increasing the number of sellers affects the price and quantity:
• The output effect: Because price is above marginal cost, selling more at the going price raises profits. • The price effect: Raising production will increase the amount sold, which will lower the price and the profit per unit on all units sold.
Copyright © 2004 South-Western
How the Size of an Oligopoly Affects the Market Outcome
• As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. • The price approaches marginal cost, and the quantity produced approaches the socially efficient level.
Copyright © 2004 South-Western
GAME THEORY AND THE ECONOMICS OF COOPERATION
• Game theory is the study of how people behave in strategic situations. • Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
Copyright © 2004 South-Western
GAME THEORY AND THE ECONOMICS OF COOPERATION
• Because the number of firms in an oligopolistic market is small, each firm must act strategically. • Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.
Copyright © 2004 South-Western
The Prisoners’ Dilemma
• The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation. • Often people (firms) fail to cooperate with one another even when cooperation would make them better off.
Copyright © 2004 South-Western
The Prisoners’ Dilemma
• The prisoners’ dilemma is a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
Copyright © 2004 South-Western
Figure 2 The Prisoners’ Dilemma
Bonnie’ s Decision
Confess Bonnie gets 8 years
Remain Silent Bonnie gets 20 years
Confess Clyde’s Decision Remain Silent Clyde gets 8 years Bonnie goes free Clyde goes free Bonnie gets 1 year
Clyde gets 20 years
Clyde gets 1 year
Copyright©2003 Southwestern/Thomson Learning
The Prisoners’ Dilemma
• The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players.
Copyright © 2004 South-Western
The Prisoners’ Dilemma
• Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.
Copyright © 2004 South-Western
Figure 3 An Oligopoly Game
Iraq’s Decision High Production Iraq gets $40 billion High Production Iran’s Decision Low Production Iran gets $30 billion Iran gets $50 billion Iran gets $40 billion Iraq gets $60 billion Iran gets $60 billion Iraq gets $50 billion Low Production Iraq gets $30 billion
Copyright©2003 Southwestern/Thomson Learning
Oligopolies as a Prisoners’ Dilemma
• Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.
Copyright © 2004 South-Western
Figure 4 An Arms-Race Game
Decision of the United States (U.S.)
Arm U.S. at risk Arm
Decision of the Soviet Union (USSR)
Disarm U.S. at risk and weak
USSR at risk
USSR safe and powerful
U.S. safe and powerful
U.S. safe
Disarm
USSR at risk and weak USSR safe
Copyright©2003 Southwestern/Thomson Learning
Figure 5 An Advertising Game
Marlboro’ s Decision
Advertise Marlboro gets $3 billion profit Advertise Camel’s Decision Don’t Advertise Camel gets $3 billion profit Marlboro gets $5 billion profit Camel gets $2 billion profit
Don’t Advertise Marlboro gets $2 billion profit Camel gets $5 billion profit Marlboro gets $4 billion profit Camel gets $4 billion profit
Copyright©2003 Southwestern/Thomson Learning
Figure 6 A Common-Resource Game
Exxon ’s Decision Drill Two Wells Exxon gets $4 million profit Texaco gets $4 million profit Exxon gets $6 million profit Drill One Well Exxon gets $3 million profit Texaco gets $6 million profit Exxon gets $5 million profit Texaco gets $5 million profit
Drill Two Wells Texaco’s Decision
Drill One Well
Texaco gets $3 million profit
Copyright©2003 Southwestern/Thomson Learning
Why People Sometimes Cooperate
• Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.
Copyright © 2004 South-Western
Figure 7 Jack and Jill Oligopoly Game
Jack’s Decision Sell 40 Gallons Jack gets $1,600 profit Jill gets $1,600 profit Jill gets $2,000 profit Sell 30 Gallons Jack gets $1,500 profit
Sell 40 Gallons
Jill’s Decision
Sell 30 Gallons
Jack gets $2,000 profit
Jill gets $1,500 profit Jill gets $1,800 profit
Jack gets $1,800 profit
Copyright©2003 Southwestern/Thomson Learning
PUBLIC POLICY TOWARD OLIGOPOLIES
• 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 © 2004 South-Western
Restraint of Trade and the Antitrust Laws
• Antitrust laws make it illegal to restrain trade or attempt to monopolize a market.
• Sherman Antitrust Act of 1890 • Clayton Act of 1914
Copyright © 2004 South-Western
Controversies over Antitrust Policy
• Antitrust policies sometimes may not allow business practices that have potentially positive effects:
• Resale price maintenance • Predatory pricing • Tying
Copyright © 2004 South-Western
Controversies over Antitrust Policy
• Resale Price Maintenance (or fair trade)
• occurs when suppliers (like wholesalers) require retailers to charge a specific amount
• Predatory Pricing
• 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
• Tying
• when a firm offers two (or more) of its products together at a single price, rather than separately
Copyright © 2004 South-Western
Summary
• Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. • If oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome.
Copyright © 2004 South-Western
Summary
• The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. • The logic of the prisoners’ dilemma applies in many situations, including oligopolies.
Copyright © 2004 South-Western
Summary
• Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition.
Copyright © 2004 South-Western
doc_833536816.ppt
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers.
Oligopoly
16
Copyright©2004 South-Western
BETWEEN MONOPOLY AND PERFECT COMPETITION
• Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly.
Copyright © 2004 South-Western
BETWEEN MONOPOLY AND PERFECT COMPETITION
• Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers.
Copyright © 2004 South-Western
BETWEEN MONOPOLY AND PERFECT COMPETITION
• 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.
Copyright © 2004 South-Western
Figure 1 The Four Types of Market Structure
Number of Firms? Many firms Type of Products?
One firm
Few firms
Differentiated products
Identical products
Monopoly (Chapter 15)
• Tap water • Cable TV
Oligopoly (Chapter 16)
• Tennis balls • Crude oil
Monopolistic Competition (Chapter 17) • Novels • Movies
Perfect Competition (Chapter 14) • Wheat • Milk
Copyright © 2004 South-Western
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 © 2004 South-Western
MARKETS WITH ONLY A FEW SELLERS
• Characteristics of an Oligopoly Market
• Few sellers offering similar or identical products • Interdependent firms • Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost
Copyright © 2004 South-Western
A Duopoly Example
• A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.
Copyright © 2004 South-Western
Table 1 The Demand Schedule for Water
Copyright © 2004 South-Western
A Duopoly Example
• Price and Quantity Supplied
• The price of water in a perfectly competitive market would be driven to where the marginal cost is zero:
• P = MC = $0 • Q = 120 gallons
• The price and quantity in a monopoly market would be where total profit is maximized:
• P = $60 • Q = 60 gallons
Copyright © 2004 South-Western
A Duopoly Example
• Price and Quantity 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?
Copyright © 2004 South-Western
Competition, Monopolies, and Cartels
• The duopolists may agree on a monopoly outcome.
• Collusion
• An agreement among firms in a market about quantities to produce or prices to charge.
• Cartel
• A group of firms acting in unison.
Copyright © 2004 South-Western
Competition, Monopolies, and Cartels
• Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists as a matter of public policy.
Copyright © 2004 South-Western
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 © 2004 South-Western
The Equilibrium for an Oligopoly
• When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition.
Copyright © 2004 South-Western
The Equilibrium for an Oligopoly
• The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).
Copyright © 2004 South-Western
Equilibrium for an Oligopoly
• Summary
• 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.
Copyright © 2004 South-Western
Table 1 The Demand Schedule for Water
Copyright © 2004 South-Western
How the Size of an Oligopoly Affects the Market Outcome
• How increasing the number of sellers affects the price and quantity:
• The output effect: Because price is above marginal cost, selling more at the going price raises profits. • The price effect: Raising production will increase the amount sold, which will lower the price and the profit per unit on all units sold.
Copyright © 2004 South-Western
How the Size of an Oligopoly Affects the Market Outcome
• As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. • The price approaches marginal cost, and the quantity produced approaches the socially efficient level.
Copyright © 2004 South-Western
GAME THEORY AND THE ECONOMICS OF COOPERATION
• Game theory is the study of how people behave in strategic situations. • Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
Copyright © 2004 South-Western
GAME THEORY AND THE ECONOMICS OF COOPERATION
• Because the number of firms in an oligopolistic market is small, each firm must act strategically. • Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.
Copyright © 2004 South-Western
The Prisoners’ Dilemma
• The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation. • Often people (firms) fail to cooperate with one another even when cooperation would make them better off.
Copyright © 2004 South-Western
The Prisoners’ Dilemma
• The prisoners’ dilemma is a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.
Copyright © 2004 South-Western
Figure 2 The Prisoners’ Dilemma
Bonnie’ s Decision
Confess Bonnie gets 8 years
Remain Silent Bonnie gets 20 years
Confess Clyde’s Decision Remain Silent Clyde gets 8 years Bonnie goes free Clyde goes free Bonnie gets 1 year
Clyde gets 20 years
Clyde gets 1 year
Copyright©2003 Southwestern/Thomson Learning
The Prisoners’ Dilemma
• The dominant strategy is the best strategy for a player to follow regardless of the strategies chosen by the other players.
Copyright © 2004 South-Western
The Prisoners’ Dilemma
• Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player.
Copyright © 2004 South-Western
Figure 3 An Oligopoly Game
Iraq’s Decision High Production Iraq gets $40 billion High Production Iran’s Decision Low Production Iran gets $30 billion Iran gets $50 billion Iran gets $40 billion Iraq gets $60 billion Iran gets $60 billion Iraq gets $50 billion Low Production Iraq gets $30 billion
Copyright©2003 Southwestern/Thomson Learning
Oligopolies as a Prisoners’ Dilemma
• Self-interest makes it difficult for the oligopoly to maintain a cooperative outcome with low production, high prices, and monopoly profits.
Copyright © 2004 South-Western
Figure 4 An Arms-Race Game
Decision of the United States (U.S.)
Arm U.S. at risk Arm
Decision of the Soviet Union (USSR)
Disarm U.S. at risk and weak
USSR at risk
USSR safe and powerful
U.S. safe and powerful
U.S. safe
Disarm
USSR at risk and weak USSR safe
Copyright©2003 Southwestern/Thomson Learning
Figure 5 An Advertising Game
Marlboro’ s Decision
Advertise Marlboro gets $3 billion profit Advertise Camel’s Decision Don’t Advertise Camel gets $3 billion profit Marlboro gets $5 billion profit Camel gets $2 billion profit
Don’t Advertise Marlboro gets $2 billion profit Camel gets $5 billion profit Marlboro gets $4 billion profit Camel gets $4 billion profit
Copyright©2003 Southwestern/Thomson Learning
Figure 6 A Common-Resource Game
Exxon ’s Decision Drill Two Wells Exxon gets $4 million profit Texaco gets $4 million profit Exxon gets $6 million profit Drill One Well Exxon gets $3 million profit Texaco gets $6 million profit Exxon gets $5 million profit Texaco gets $5 million profit
Drill Two Wells Texaco’s Decision
Drill One Well
Texaco gets $3 million profit
Copyright©2003 Southwestern/Thomson Learning
Why People Sometimes Cooperate
• Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.
Copyright © 2004 South-Western
Figure 7 Jack and Jill Oligopoly Game
Jack’s Decision Sell 40 Gallons Jack gets $1,600 profit Jill gets $1,600 profit Jill gets $2,000 profit Sell 30 Gallons Jack gets $1,500 profit
Sell 40 Gallons
Jill’s Decision
Sell 30 Gallons
Jack gets $2,000 profit
Jill gets $1,500 profit Jill gets $1,800 profit
Jack gets $1,800 profit
Copyright©2003 Southwestern/Thomson Learning
PUBLIC POLICY TOWARD OLIGOPOLIES
• 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 © 2004 South-Western
Restraint of Trade and the Antitrust Laws
• Antitrust laws make it illegal to restrain trade or attempt to monopolize a market.
• Sherman Antitrust Act of 1890 • Clayton Act of 1914
Copyright © 2004 South-Western
Controversies over Antitrust Policy
• Antitrust policies sometimes may not allow business practices that have potentially positive effects:
• Resale price maintenance • Predatory pricing • Tying
Copyright © 2004 South-Western
Controversies over Antitrust Policy
• Resale Price Maintenance (or fair trade)
• occurs when suppliers (like wholesalers) require retailers to charge a specific amount
• Predatory Pricing
• 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
• Tying
• when a firm offers two (or more) of its products together at a single price, rather than separately
Copyright © 2004 South-Western
Summary
• Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. • If oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome.
Copyright © 2004 South-Western
Summary
• The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual self-interest. • The logic of the prisoners’ dilemma applies in many situations, including oligopolies.
Copyright © 2004 South-Western
Summary
• Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition.
Copyright © 2004 South-Western
doc_833536816.ppt