Lecture 6 - Oligopoly and Monopolistic Competition Flashcards
Markets differ according to…
- the number of firms in the market.
- the ease with which firms may enter and leave the market.
- the ability of firms to differentiate their products from rivals’.
Oligopoly is a market structure in which…
A small group of firms each influence price and enjoy substantial barriers to entry. Actions affect rival firms so there is a need to consider the behaviour of rival firms, making the profit maximisation decision more difficult. An oligopoly firm which ignores that or inaccurately predicts rival’s behaviour will be very likely to suffer in a loss.
Example: airlines and video game producers. (Nintendo, Microsoft, Sony)
Monopolistic competition is a market structure in which…
Firms have market power but no additional firm can enter and earn a positive profit. All firms selling similar stuff but a little bit differentiated. They have market power as they can charge price higher than the marginal cost of producing the good. Have close substitute goods in the market so they still compete with each other and need to consider rival firm’s actions.
Example: Local taste bars.
Collusion is illegal in most…
Developed countries.
What is a cartel?
A cartel, a group of firms that collude, is a special case of oligopoly in which the firms behave like a monopoly.
Because firms can make even more money by cheating on the cartel agreement, collusion is not always…
Successful.
Why do cartels fail?
Cartels fail if non cartel members can supply consumers with large quantities of goods. Cartels cannot control the market.
Each member of a cartel has an incentive to cheat on the cartel agreement. One who cheats can successfully sell more output and enjoy higher market price that will give them higher profits, overall.
Why do cartels fail?
Cartels fail if non cartel members can supply consumers with large quantities of goods. Cartels cannot control the market.
Each member of a cartel has an incentive to cheat on the cartel agreement. One who cheats can successfully sell more output and enjoy higher market price that will give them higher profits, overall.
How to maintain cartels?
- Detection of cheating and enforcement behaviour.
- Government support/intervention.
- Barriers to entry (fewer firms makes cheating easier to detect).
- Mergers.
What were cartels previously called in the US?
Trusts.
Trusts were legal and common in oil, railroad, sugar and tobacco industries, but what effect did this have?
It raised prices substantially above competitive levels.
In response to the trusts higher prices, the US Congress passed the Sherman Antitrust Act (1890) and Federal Trade Commission Act (1914). What did these do?
- Prohibit firms from explicitly agreeing to take actions that reduce competition.
- Jointly setting price strictly prohibited.
- Antitrust laws reduce probability that cartels form.
OPEC, the most famous cartel, formed in 1960 is not…
Illegal among participating countries.
The Cournot model explains how…
Oligopoly firms behave if they simultaneously choose how much they produce (quantity strategy/ output).
What are the four main assumptions in the Cournot Oligopoly Model?
- There are two firms and no others can enter the market.
- The firms have identical costs.
- The firms sell identical products.
- The firms set their quantities simultaneously.
