Oligopoly

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Oligopoly

• Alexa Hartmayer

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Key Concepts

• A market Situation in which there are very few
  sellers. Each seller knows that the other sellers
  will react to its changes in prices and
  quantities.
• - Economics Today (pg 619)

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Characteristics

• Small Number of Firms
• Homogeneous or Differentiated products
• Homogeneous Cement, Zinc, Copper
• Differentiated Automobiles, Greeting Cards
• Interdependent Every individual firm must
  consider the actions of other firms
• Strategic Dependence When one firm counters
  anothers price, quality, advertising, to ensure
  the firms welfare

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Causes of Oligopolies (1)

• Economies of Scale
• Firms total cost curve will slope downward as
  more outputs are produced. Average total cost
  will be reduced as firms expand the scale of
  their operation.
• Smaller firms will have a tendency to be
  inefficient (ATC greater than large firms). They
  are either absorbed or go out of business.

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Causes of Oligopolies (2)

• Barriers to Entry Difficult to Enter
• Legal Barriers (patents)
• Control over Resources
• Cartels (OPEC)
• Collusion (illegal in United States)

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Causes of Oligopolies (3)

• Mergers Joining of two or more firms under
  single ownership and control
• Horizontal Merger Joining of firms that are
  producing or selling a similar product
• Vertical Merger Joining of a firm with another
  to which it sells an output or from which it buys
  an input

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Game Theory

• Analytical framework in which two or more
  individuals, companies, or nation compete for
  certain payoffs that depend on the strategy that
  others employ
• Low Price/High PriceWinner and Loser
• Low Price/Low PriceWinner and Winner
• High Price/High PriceBig Winner and Big Winner
• Collusion (illegal in US)
• Nash Equilibrium When the strategies of all the
  player are optimum (self enforcing)

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Kinked Demand Curve

• Price inflexibility
• Above P1 is relatively elastic
• Below P1 is relatively inelastic
• MCMR is profit maximization

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Losses Profits
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Breaking Even
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Comparing Market Structures

• Refer to page 633 in textbook

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Oligopoly Question (1)

• (E)- The strategy for Bright is fully dependant
  on Sparkles strategy, and Sparkles dominant
  strategy is strategy 1

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(2)

• Produces the Best results for every possible
  action the other participants take
• Firms will try to maximize their profits by
  picking their dominant strategy, or by watching
  the other firms dominant strategy

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(3)

• Interdependence in an industry.
• Game theory is a way of describing the various
  outcomes in any situation involving two or more
  competing firms.

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(No Transcript)
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Answers to Free Response

1. Mutual Interdependence, the behavior of one firm
   affects the other.
2. Evening Departure would be the best strategy.
3. Morning Departure is dominant for Windward.
4. Choosing an evening strategy is not dominant.
   Airtouch does not have a dominant strategy
   because its best payoff depends on Windwards
   strategy.
5. 700 will be Windwards daily profit.

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Ode to the Oligopoly

• They rise from ashes of enemies past
• the truest gluttons any shall see.
• Consuming the horizon, the zenith
• of humanities sullen world.
• Asking in voices of sinister mirth
• Shall we play a game?
• Failing to follow in suite will lead to loss
• Yet complying without a care
• Will cause lady of law to weigh her scales
• Laying your avarice bare to blinded eyes

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Real World Links

• http//www.torontosun.com/money/2011/01/19/1695122
  6.html
• http//www.dofonline.co.uk/content/view/5080/152/