Topic 15- Oligopoly Flashcards
Key features of Oligopoly
- natural or legal barriers prevent the entry of new firms
- a small number of firms compete
who is the suppliers in oligopoly
-few sellers offer similar or identical products
How do you know if it is a monopoly or oligopoly?
Look at demand curve
For perfectly competitive markets= demand is marginal revenue curve it is perfectly straight!!!!!! because in a perfectly competitive market people will buy only at the market price
However if the demand curve is going down it indicates that the price can be manipulated and people will still buy- this only happens if there are limtiied suppliers AKA A MONOPOLY BIATCH
What are the barriers to entry
-Economies of scale
-ownership of a key input
-Govt imposed barriers
Barriers to entry: economies of scale
The lrac curve is still decreases as the firm increases output, IT IS CHEAPER FOR TWO-THREE FIRMS to cover entire market demand
Natural duopoly
A market with two firms, where together both can cover the market demand!!
The ATC of one firm is half the quantity demanded, so you need one more firm to cover the other half
A natural oligpoly
A market with three firms
The ATC of one firm ia 1/3 the quantity demanded, so you need 3 firms to cover the total quantity demadned
When may a legal oligpoly arise
even where the demand and costs leave room for a large number of firms- if the govt gives irghts to these three then these three are the only ones!
What happens when there are only a small number of firms
- Interdependance (each individual firms profit depends on every firms actions)
- temptation to co-operate (firms in oligioply feel tempted to co-operate and form a cartel!! jacking the price up significant, decreasing outputs,increasing profits)
Game Theory
Studies the strategic behaviour and decision making- mutual recognition of interdependance
Rules of all games
- rules
- strategies all athe possible actions of every player
- payoffs are the results of the interactions amoing the players stragtgises
- outcomes
The Prisoners’ Dillema
two parties, separated and unable to communicate, must each choose between cooperating with the other or not. The highest reward for each party occurs when both parties choose to co-operate.
BUTTTT because rational thinkers, they choose to not co-operate and both suffer
strategies
outcomes
payoffs
ALL OF THE PRISONERS’ DILEMMA
- confess/deny
- both confess, both deny, A confess B deny, A deny Bconfess
- each prisoner can work out what happens to him and the other!
Payoff matrix
Shows the 4 possible outcomes
How to think about the player matrix
Think of it in rows and columns, A’s actions are the twon columns beneath, and B’s actions are the two rows beside
Dominant strategy
the strategy that is best for a player in a game regardless of the strategies chosen by other players
What action will any game player do?
the rational on ethat is in self-interest, that will make the player better off
Nash equilibrium
When both players are rational they will choose their actions in their own self interest, THIS IS THE POSITION WHERE EAHCH PLAYER IS LOOKING OUT FOR THEM SELF
Nash equilibrium for prisoners dilemma
both confess!!
Is there a better outcome then the nash equilibrium
YES! but cant be achieved, because each player figrures out there is a better strategy (The dominant strategy to be achieved)
Collusive agreement
-strategies
-outcomes
when two firms agree to form a cartel, raise the price of good, decrease output, increase proft
STRATEGIES: Comply or Cheat
Outcomes: Both compy, both cheat, a complies b cheats, b complies a cheats
How do firms in oligopoly maximize economic profit?
set the cartel’s marginal cost=marginal revenue!! REMEMBER THE MARGINAL REVENUE CURVE OF OLIGOPOLY is the same as that of a monopoly (diagonal below price at every point)
What is the marginal cost curve of the industry of oligopolys
The horizontal sum of the MC curves fo the two firms
If one firms in oligopoly increases output?
the profit for that firm would increase, the other firm would take an economic loss!!!!!!!1 the price would lower and the complying firm would be hurt :(
If both firms in oligopoly increases output (both cheat)
Market equilbrium is reached!! both firms make zero profit in the long run of this perfectly competitive market
If neither cheat
Then both firms profit greatly! but not as great as they would with cheating :)
What strategy will the firms choose
BOTH WILL CHEAT! this is the nash equilbrium
the quantity and price achieved in this outcome will be that of a competitive market, both firms will make zero eocnomic profit
public policy to oligopolies
- policymakerrs try to induce firms in oligopoly to compete rather than co-operate
- competition adn anti-trust laws!!!
- The application of these laws can be controversial because some
behaviour that may seem to reduce competition may in fact have
legitimate business purposes.
oligopoly vs monopoly
Oligopolistic firms are interdependent in a way that competitive firms are not. Our goal in this chapter is to see how this interdependence shapes the firms’ behaviour and what problems it raises for public policy.
