Lecture 4: Monopoly and Oligopoly Flashcards
Competition policy
- forbids a single firm having a too large market share
* forbids abuse of a dominant position
Public ownership
having the good supplied by the government or by a firm owned by
the government.
Price regulation
limit the price that a monopolist is allowed to charge
Price Discrimination
• A single-price monopolist offers its product to all consumers at the
same price.
• A monopolist engages in price discrimination when she charges
different prices to different consumers for the same good
Perfect price discrimination
monopolist charges price = wtp from
each consumer:
→What happens to total surplus compared to perfectly competitive market?
Oligopoly
an industry with only a small number of producers; a
producer in such an industry is known as an oligopolist.
Duopoly
oligopoly consisting of only two firms. Each firm is
known as a duopolist.
where does oligoly come from?
It arises from the same forces that lead to monopoly (entry barriers,
economies of scale), except in weaker form.
imperfect competition
Situation where competing firms can affect market prices (= market power)
Monopoly
• A monopolist is a firm that is the only producer of a good. • An industry controlled by a monopolist is a monopoly. • A monopolist has market power = the ability to raise price above the competitive level (NB. just like oligopolists; after break)
Why Do Monopolies Exist?
• To earn economic profits, a monopolist must be protected by a barrier to
entry –something that prevents other firms from entering the market:
• Control of a scare resource (e.g., DeBeers)
• Increasing returns to scale (reduction of costs per unit as the
amount of production increases, e.g., gas companies).
→natural monopoly.
• Technological superiority (e.g., Intel in chip manufacturing)
• Network externality (the value of a good for user is greater when
many others use it; e.g., social media, Word, etc.)
• Government created (e.g., patents, copyrights; medicine)
Antitrust policy:
consist of efforts undertaken by governments
to prevent oligopolistic industries from becoming or behaving
like monopolies
noncooperative (Nash) equilibrium
player’s do not take the
effect of their action on other into account
Another example of a prisoner’s dilemma
a game based on two
premises: (1) each player has an incentive to choose an action that
benefits itself at the others player’sexpense; and (2) both players are
worse off than if they had acted cooperatively
Cournot Nash equilibrium
the Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce.
Tit for tat:
playing cooperatively at first, then doing whatever the
other player did in the previous period.
Repeated Interaction
We saw that Qoligopoly is smaller than Qmonopoly
• ‘Games played by oligopolists’ are mostly not one-shot, but
repeated (e.g., each year).
• Another strategic element: attempt to influence the future
behaviour of other firms.
coordination game
Repeated interaction can transform prisoner’s dilemma in a so-
called coordination game (has two Nash equilibria!)
Tacit collusion:
firms limit production and raise prices even though
they have not made any formal agreement.
e.g., if both oligopolists do tit-for-tat.
Tacit collusion depends on
- Number of firms on market (concentration)
- Complexity of products (easier to keep track of actions others)
- Differences in interests (differing options of what is fair; split 50/50)?
- Bargaining power of buyers
Elements that make an oligopoly closer to monopoly:
- Few firms in the market
- No market power on the part of buyers
- Demand easily predictable
- Transparent product and pricing strategy
