Lecture 4: Monopoly and Oligopoly

Question 1

Competition policy

Answer 1

• forbids a single firm having a too large market share

* forbids abuse of a dominant position

Question 2

Public ownership

Answer 2

having the good supplied by the government or by a firm owned by
the government.

Question 3

Price regulation

Answer 3

limit the price that a monopolist is allowed to charge

Question 4

Price Discrimination

Answer 4

• 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

Question 5

Perfect price discrimination

Answer 5

monopolist charges price = wtp from

each consumer:

Question 6

→What happens to total surplus compared to perfectly competitive market?

Question 7

Oligopoly

Answer 7

an industry with only a small number of producers; a

producer in such an industry is known as an oligopolist.

Question 8

Duopoly

Answer 8

oligopoly consisting of only two firms. Each firm is

known as a duopolist.

Question 9

where does oligoly come from?

Answer 9

It arises from the same forces that lead to monopoly (entry barriers,
economies of scale), except in weaker form.

Question 10

imperfect competition

Answer 10

Situation where competing firms can affect market prices (= market power)

Question 11

Monopoly

Answer 11

• 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)

Question 12

Why Do Monopolies Exist?

Answer 12

• 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)

Question 13

Antitrust policy:

Answer 13

consist of efforts undertaken by governments
to prevent oligopolistic industries from becoming or behaving
like monopolies

Question 14

noncooperative (Nash) equilibrium

Answer 14

player’s do not take the

effect of their action on other into account

Question 15

Another example of a prisoner’s dilemma

Answer 15

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

Question 16

Cournot Nash equilibrium

Answer 16

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.

Question 17

Tit for tat:

Answer 17

playing cooperatively at first, then doing whatever the

other player did in the previous period.

Question 18

Repeated Interaction

Answer 18

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.

Question 19

coordination game

Answer 19

Repeated interaction can transform prisoner’s dilemma in a so-
called coordination game (has two Nash equilibria!)

Question 20

Tacit collusion:

Answer 20

firms limit production and raise prices even though
they have not made any formal agreement.
e.g., if both oligopolists do tit-for-tat.

Question 21

Tacit collusion depends on

Answer 21

• 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

Question 22

Elements that make an oligopoly closer to monopoly:

Answer 22

• Few firms in the market
• No market power on the part of buyers
• Demand easily predictable
• Transparent product and pricing strategy