10/11/2017
BETWEEN MONOPOLY AND
PERFECT COMPETITION
• Imperfect competition refers to those market
structures that fall between perfect competition
and pure monopoly.
Oligopoly
Copyright©2004 South-Western
Copyright © 2004 South-Western
BETWEEN MONOPOLY AND BETWEEN MONOPOLY AND
PERFECT COMPETITION PERFECT COMPETITION
• Imperfect competition includes industries in • Types of Imperfectly Competitive Markets
which firms have competitors but do not face so • Oligopoly
much competition that they are price takers. • Only a few sellers, each offering a similar or identical
product to the others.
• Monopolistic Competition
• Many firms selling products that are similar but not
identical.
Copyright © 2004 South-Western Copyright © 2004 South-Western
Figure 1 The Four Types of Market Structure
MARKETS WITH ONLY A FEW
SELLERS
Number of Firms?
• Because of the few sellers, the key feature of
Many
firms oligopoly is the tension between cooperation
Type of Products? and self-interest.
One Few Differentiated Identical
firm firms products products
Monopolistic Perfect
Monopoly Oligopoly Competition Competition
(Chapter 15) (Chapter 16) (Chapter 17) (Chapter 14)
• Tap water • Tennis balls • Novels • Wheat
• Cable TV • Crude oil • Movies • Milk
Copyright © 2004 South-Western Copyright © 2004 South-Western
1
10/11/2017
MARKETS WITH ONLY A FEW A Duopoly Example
SELLERS
• Characteristics of an Oligopoly Market • A duopoly is an oligopoly with only two
• Few sellers offering similar or identical products members. It is the simplest type of oligopoly.
• Interdependent firms
• Best off cooperating and acting like a monopolist
by producing a small quantity of output and
charging a price above marginal cost
Copyright © 2004 South-Western Copyright © 2004 South-Western
Table 1 The Demand Schedule for Water
A Duopoly Example
• Price and Quantity Supplied
• The price of water in a perfectly competitive market
would be driven to where the marginal cost is zero:
• P = MC = $0
• Q = 120 gallons
• The price and quantity in a monopoly market would
be where total profit is maximized:
• P = $60
• Q = 60 gallons
Copyright © 2004 South-Western Copyright © 2004 South-Western
A Duopoly Example Competition, Monopolies, and Cartels
• Price and Quantity Supplied • The duopolists may agree on a monopoly
• The socially efficient quantity of water is 120 outcome.
gallons, but a monopolist would produce only 60 • Collusion
gallons of water. • An agreement among firms in a market about quantities
• So what outcome then could be expected from to produce or prices to charge.
duopolists? • Cartel
• A group of firms acting in unison.
Copyright © 2004 South-Western Copyright © 2004 South-Western
2
10/11/2017
Competition, Monopolies, and Cartels The Equilibrium for an Oligopoly
• Although oligopolists would like to form cartels • A Nash equilibrium is a situation in which
and earn monopoly profits, often that is not economic actors interacting with one another
possible. Antitrust laws prohibit explicit each choose their best strategy given the
agreements among oligopolists as a matter of strategies that all the others have chosen.
public policy.
Copyright © 2004 South-Western Copyright © 2004 South-Western
The Equilibrium for an Oligopoly The Equilibrium for an Oligopoly
• When firms in an oligopoly individually choose • The oligopoly price is less than the monopoly
production to maximize profit, they produce price but greater than the competitive price
quantity of output greater than the level (which equals marginal cost).
produced by monopoly and less than the level
produced by competition.
Copyright © 2004 South-Western Copyright © 2004 South-Western
Table 1 The Demand Schedule for Water
Equilibrium for an Oligopoly
• Summary
• Possible outcome if oligopoly firms pursue their
own self-interests:
• Joint output is greater than the monopoly quantity but less
than the competitive industry quantity.
• Market prices are lower than monopoly price but greater
than competitive price.
• Total profits are less than the monopoly profit.
Copyright © 2004 South-Western Copyright © 2004 South-Western
3
10/11/2017
How the Size of an Oligopoly Affects the Market How the Size of an Oligopoly Affects the Market
Outcome Outcome
• How increasing the number of sellers affects • As the number of sellers in an oligopoly grows
the price and quantity: larger, an oligopolistic market looks more and
• The output effect: Because price is above marginal more like a competitive market.
cost, selling more at the going price raises profits. • The price approaches marginal cost, and the
• The price effect: Raising production will increase quantity produced approaches the socially
the amount sold, which will lower the price and the efficient level.
profit per unit on all units sold.
Copyright © 2004 South-Western Copyright © 2004 South-Western
GAME THEORY AND THE GAME THEORY AND THE
ECONOMICS OF COOPERATION ECONOMICS OF COOPERATION
• Game theory is the study of how people behave • Because the number of firms in an oligopolistic
in strategic situations. market is small, each firm must act
• Strategic decisions are those in which each strategically.
person, in deciding what actions to take, must • Each firm knows that its profit depends not only
consider how others might respond to that on how much it produces but also on how much
action. the other firms produce.
Copyright © 2004 South-Western Copyright © 2004 South-Western
The Prisoners’ Dilemma The Prisoners’ Dilemma
• The prisoners’ dilemma provides insight into • The prisoners’ dilemma is a particular “game”
the difficulty in maintaining cooperation. between two captured prisoners that illustrates
• Often people (firms) fail to cooperate with why cooperation is difficult to maintain even
one another even when cooperation would when it is mutually beneficial.
make them better off.
Copyright © 2004 South-Western Copyright © 2004 South-Western
4
10/11/2017
Figure 2 The Prisoners’ Dilemma
The Prisoners’ Dilemma
Bonnie’ s Decision
• The dominant strategy is the best strategy for a
Confess Remain Silent player to follow regardless of the strategies
Bonnie gets 8 years Bonnie gets 20 years chosen by the other players.
Confess
Clyde’s Clyde gets 8 years Clyde goes free
Decision Bonnie goes free Bonnie gets 1 year
Remain
Silent
Clyde gets 20 years Clyde gets 1 year
Copyright©2003 Southwestern/Thomson Learning Copyright © 2004 South-Western
Figure 3 An Oligopoly Game
The Prisoners’ Dilemma
• Cooperation is difficult to maintain, because Iraq’s Decision
cooperation is not in the best interest of the High Production Low Production
individual player. Iraq gets $40 billion Iraq gets $30 billion
High
Production
Iran gets $40 billion Iran gets $60 billion
Iran’s
Decision Iraq gets $60 billion Iraq gets $50 billion
Low
Production
Iran gets $30 billion Iran gets $50 billion
Copyright © 2004 South-Western Copyright©2003 Southwestern/Thomson Learning
Figure 4 An Arms-Race Game
Oligopolies as a Prisoners’ Dilemma
• Self-interest makes it difficult for the oligopoly Decision of the United States (U.S.)
to maintain a cooperative outcome with low Arm Disarm
production, high prices, and monopoly profits. U.S. at risk U.S. at risk and weak
Arm
Decision
USSR at risk USSR safe and powerful
of the
Soviet Union U.S. safe and powerful U.S. safe
(USSR)
Disarm
USSR at risk and weak USSR safe
Copyright © 2004 South-Western Copyright©2003 Southwestern/Thomson Learning
5
10/11/2017
Figure 5 An Advertising Game Figure 6 A Common-Resource Game
Exxon ’s Decision
Marlboro’ s Decision
Drill Two Wells Drill One Well
Advertise Don’t Advertise Exxon gets $4 Exxon gets $3
million profit million profit
Marlboro gets $3 Marlboro gets $2 Drill Two
billion profit billion profit Wells
Advertise Texaco gets $4 Texaco gets $6
Camel gets $3 Camel gets $5 Texaco’s million profit million profit
Camel’s billion profit billion profit Decision Exxon gets $6 Exxon gets $5
Decision million profit million profit
Marlboro gets $5 Marlboro gets $4
Drill One
billion profit billion profit
Don’t Well
Texaco gets $3 Texaco gets $5
Advertise
Camel gets $2 Camel gets $4 million profit million profit
billion profit billion profit
Copyright©2003 Southwestern/Thomson Learning Copyright©2003 Southwestern/Thomson Learning
Figure 7 Jack and Jill Oligopoly Game
Why People Sometimes Cooperate
• Firms that care about future profits will Jack’s Decision
cooperate in repeated games rather than Sell 40 Gallons Sell 30 Gallons
cheating in a single game to achieve a one-time Jack gets
$1,600 profit
Jack gets
$1,500 profit
gain. Sell 40
Gallons
Jill gets Jill gets
Jill’s $1,600 profit $2,000 profit
Decision Jack gets Jack gets
$2,000 profit $1,800 profit
Sell 30
Gallons
Jill gets Jill gets
$1,500 profit $1,800 profit
Copyright © 2004 South-Western Copyright©2003 Southwestern/Thomson Learning
PUBLIC POLICY TOWARD Restraint of Trade and the Antitrust Laws
OLIGOPOLIES
• Cooperation among oligopolists is undesirable • Antitrust laws make it illegal to restrain trade or
from the standpoint of society as a whole attempt to monopolize a market.
because it leads to production that is too low • Sherman Antitrust Act of 1890
and prices that are too high . • Clayton Act of 1914
Copyright © 2004 South-Western Copyright © 2004 South-Western
6
10/11/2017
Controversies over Antitrust Policy Controversies over Antitrust Policy
• Antitrust policies sometimes may not allow • Resale Price Maintenance (or fair trade)
business practices that have potentially positive • occurs when suppliers (like wholesalers) require
effects: retailers to charge a specific amount
• Resale price maintenance • Predatory Pricing
• Predatory pricing • occurs when a large firm begins to cut the price of
• Tying its product(s) with the intent of driving its
competitor(s) out of the market
• Tying
• when a firm offers two (or more) of its products
together at a single price, rather than separately
Copyright © 2004 South-Western Copyright © 2004 South-Western
Summary Summary
• Oligopolists maximize their total profits by • The prisoners’ dilemma shows that self-interest
forming a cartel and acting like a monopolist. can prevent people from maintaining
• If oligopolists make decisions about production cooperation, even when cooperation is in their
levels individually, the result is a greater mutual self-interest.
quantity and a lower price than under the • The logic of the prisoners’ dilemma applies in
monopoly outcome. many situations, including oligopolies.
Copyright © 2004 South-Western Copyright © 2004 South-Western
Summary
• Policymakers use the antitrust laws to prevent
oligopolies from engaging in behavior that
reduces competition.
Copyright © 2004 South-Western
