Copyright©2004South-Western16OligopolyCopyright©2004South-WesternBETWEENMONOPOLYANDPERFECTCOMPETITION•Imperfectcompetitionreferstothosemarketstructuresthatfallbetweenperfectcompetitionandpuremonopoly.Copyright©2004South-WesternBETWEENMONOPOLYANDPERFECTCOMPETITION•Imperfectcompetitionincludesindustriesinwhichfirmshavecompetitorsbutdonotfacesomuchcompetitionthattheyarepricetakers.Copyright©2004South-WesternBETWEENMONOPOLYANDPERFECTCOMPETITION•TypesofImperfectlyCompetitiveMarkets•Oligopoly•Onlyafewsellers,eachofferingasimilaroridenticalproducttotheothers.•MonopolisticCompetition•Manyfirmssellingproductsthataresimilarbutnotidentical.Figure1TheFourTypesofMarketStructureCopyright©2004South-Western•Tapwater•CableTVMonopoly(Chapter15)•Novels•MoviesMonopolisticCompetition(Chapter17)•Tennisballs•CrudeoilOligopoly(Chapter16)NumberofFirms?Perfect•Wheat•MilkCompetition(Chapter14)TypeofProducts?IdenticalproductsDifferentiatedproductsOnefirmFewfirmsManyfirmsCopyright©2004South-WesternMARKETSWITHONLYAFEWSELLERS•Becauseofthefewsellers,thekeyfeatureofoligopolyisthetensionbetweencooperationandself-interest.Copyright©2004South-WesternMARKETSWITHONLYAFEWSELLERS•CharacteristicsofanOligopolyMarket•Fewsellersofferingsimilaroridenticalproducts•Interdependentfirms•BestoffcooperatingandactinglikeamonopolistbyproducingasmallquantityofoutputandchargingapriceabovemarginalcostCopyright©2004South-WesternADuopolyExample•Aduopolyisanoligopolywithonlytwomembers.Itisthesimplesttypeofoligopoly.Table1TheDemandScheduleforWaterCopyright©2004South-WesternCopyright©2004South-WesternADuopolyExample•PriceandQuantitySupplied•Thepriceofwaterinaperfectlycompetitivemarketwouldbedriventowherethemarginalcostiszero:•P=MC=$0•Q=120gallons•Thepriceandquantityinamonopolymarketwouldbewheretotalprofitismaximized:•P=$60•Q=60gallonsCopyright©2004South-WesternADuopolyExample•PriceandQuantitySupplied•Thesociallyefficientquantityofwateris120gallons,butamonopolistwouldproduceonly60gallonsofwater.•Sowhatoutcomethencouldbeexpectedfromduopolists?Copyright©2004South-WesternCompetition,Monopolies,andCartels•Theduopolistsmayagreeonamonopolyoutcome.•Collusion•Anagreementamongfirmsinamarketaboutquantitiestoproduceorpricestocharge.•Cartel•Agroupoffirmsactinginunison.Copyright©2004South-WesternCompetition,Monopolies,andCartels•Althougholigopolistswouldliketoformcartelsandearnmonopolyprofits,oftenthatisnotpossible.Antitrustlawsprohibitexplicitagreementsamongoligopolistsasamatterofpublicpolicy.Copyright©2004South-WesternTheEquilibriumforanOligopoly•ANashequilibriumisasituationinwhicheconomicactorsinteractingwithoneanothereachchoosetheirbeststrategygiventhestrategiesthatalltheothershavechosen.Copyright©2004South-WesternTheEquilibriumforanOligopoly•Whenfirmsinanoligopolyindividuallychooseproductiontomaximizeprofit,theyproducequantityofoutputgreaterthanthelevelproducedbymonopolyandlessthanthelevelproducedbycompetition.Copyright©2004South-WesternTheEquilibriumforanOligopoly•Theoligopolypriceislessthanthemonopolypricebutgreaterthanthecompetitiveprice(whichequalsmarginalcost).Copyright©2004South-WesternEquilibriumforanOligopoly•Summary•Possibleoutcomeifoligopolyfirmspursuetheirownself-interests:•Jointoutputisgreaterthanthemonopolyquantitybutlessthanthecompetitiveindustryquantity.•Marketpricesarelowerthanmonopolypricebutgreaterthancompetitiveprice.•Totalprofitsarelessthanthemonopolyprofit.Table1TheDemandScheduleforWaterCopyright©2004South-WesternCopyright©2004South-WesternHowtheSizeofanOligopolyAffectstheMarketOutcome•Howincreasingthenumberofsellersaffectsthepriceandquantity:•Theoutputeffect:Becausepriceisabovemarginalcost,sellingmoreatthegoingpriceraisesprofits.•Thepriceeffect:Raisingproductionwillincreasetheamountsold,whichwilllowerthepriceandtheprofitperunitonallunitssold.Copyright©2004South-WesternHowtheSizeofanOligopolyAffectstheMarketOutcome•Asthenumberofsellersinanoligopolygrowslarger,anoligopolisticmarketlooksmoreandmorelikeacompetitivemarket.•Thepriceapproachesmarginalcost,andthequantityproducedapproachesthesociallyefficientlevel.Copyright©2004South-WesternGAMETHEORYANDTHEECONOMICSOFCOOPERATION•Gametheoryisthestudyofhowpeoplebehaveinstrategicsituations.•Strategicdecisionsarethoseinwhicheachperson,indecidingwhatactionstotake,mustconsiderhowothersmightrespondtothataction.Copyright©2004South-WesternGAMETHEORYANDTHEECONOMICSOFCOOPERATION•Becausethenumberoffirmsinanoligopolisticmarketissmall,eachfirmmustactstrategically.•Eachfirmknowsthatitsprofitdependsnotonlyonhowmuchitproducesbutalsoonhowmuchtheotherfirmsproduce.Copyright©2004South-WesternThePrisoners’Dilemma•Theprisoners’dilemmaprovidesinsightintothedifficultyinmaintainingcooperation.•Oftenpeople(firms)failtocooperatewithoneanotherevenwhencooperationwouldmakethembetteroff.Copyright©2004South-WesternThePrisoners’Dilemma•Theprisoners’dilemmaisaparticular“game”betweentwocapturedprisonersthatillustrateswhycooperationisdifficulttomaintainevenwhenitismutuallybeneficial.Figure2ThePrisoners’DilemmaCopyright©2003Southwestern/ThomsonLearni