Chapter 18 Flashcards
what is Concentration ratio
Percentage of total output in the market supplied by the four largest firms
The higher the concentration ratio,
the less competition
oligopoly
A market structure in which only a few sellers offer similar or identical products
(high concentration ratio)
Strategic behavior in oligopoly:
- A firm’s decisions about P or Q can affect other firms and cause them to react
- The firm will consider these reactions when making decisions
- Oligopolistic firms are interdependent in a way that competitive firms are not.
In making its production decision, each firm in an oligopoly should consider how…
how its decision might affect the production decisions of the other firms in the market
duopoly:
an oligopoly with two firms
One possible duopoly outcome is..
collusion
Collusion is
Agreement among firms in a market about quantities to produce or prices to charge
Cartel is
A group of firms acting in unison
Cartel must agree not only on the total level of production but also …
on the amount produced by each member.
a larger market share means
larger profit.
Anti- trust laws prohibit..
explicit agreements among oligopolists as a matter of public policy.
In the absence of a binding agreement,
monopoly outcome is unlikely
By pursuing their individual self-interest when deciding how much to produce, the duopolists..
- Produce a total quantity greater than the monopoly quantity
- Charge a price lower than the monopoly price
- Earn total profit less than the monopoly profit
Nash equilibrium
- Economic actors interacting with one another, each choose their best strategy
- Given the strategies that all the other actors have chosen
When firms in an oligopoly individually choose production to maximize profit
(Q)
Produce Q
Greater than monopoly Q
Less than competitive Q
When firms in an oligopoly individually choose production to maximize profit (P)
The price is
Less than the monopoly P
Greater than the competitive P = MC
most profit will happen when duopoly..
acts as a monopoly
Increasing output has two effects on a firm’s profits:
- Output effect
- Price effect
Output effect:
If P > MC, increasing output raises profits
Price effect:
Raising output increases market quantity, which reduces price and reduces profit on all units sold
As the number of sellers in an oligopoly increases:
- The price effect becomes smaller
- The oligopoly looks more and more like a competitive market
- P approaches MC
- The market quantity approaches the socially efficient quantity
- Another benefit of international trade
Prisoners’ dilemma
Particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Dominant strategy
Strategy that is best for a player in a game regardless of the strategies chosen by the other players
Cooperation between the prisoners is difficult to maintain because cooperation is individually irrational
When oligopolies form a cartel
In hopes of reaching the monopoly outcome,
they become players in a prisoners’ dilemma.
Oligopolies have trouble maintaining monopoly profits
Monopoly outcome is jointly rational, but each oligopolist has an incentive to cheat. Self-interest makes it hard for the oligopolists to maintain the cooperative outcome.
Noncooperative oligopoly equilibrium May be bad for society
Examples: Arms race game, Common resource game
Noncooperative oligopoly equilibrium
May be bad for oligopolists because
Prevents them from achieving monopoly profits
Noncooperative oligopoly equilibrium
May be good for society
Quantity and price – closer to optimal level
Policymakers try to induce firms in an oligopoly to
compete rather than cooperate
to
Move the allocation of resources closer to the social optimum
Controversies over Antitrust Policy
Used to condemn some business practices whose effects are not obvious
Resale price maintenance
Predatory pricing
Bundling
Resale price maintenance (fair trade)
Require retailers to charge customers a given price
Might seem anticompetitive
Prevents the retailers from competing on price
Predatory Pricing
- Charge prices that are too low
- Anticompetitive
- Price cuts may be intended to drive other firms out of the market
Skeptics
- Predatory pricing — not a profitable strategy
- Price war — to drive out a rival’ prices are driven below cost
Bundling
- Offer two goods together at a single price
- Expand market power
Skeptics
- Cannot increase market power by binding two goods together
- Form of price discrimination
- Bundling may increase profit
