Chapter 15 Oligopoly

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Chapter 15 Oligopoly"

Transcription

1 Goldwasser AP Microeconomics Chapter 15 Oligopoly BEFORE YOU READ THE CHAPTER Summary This chapter explores oligopoly, a market structure characterized by a few firms producing a product that mayor may not be differentiated. The chapter discusses the incentives for oligopolists to act cooperatively or competitively and the results of these actions on the level of oligopoly profits. The chapter discusses formal as well as tacit collusion, the formation of cartels, and the reasons why cartels fail. In addition, the chapter discusses game theory and its usefulness in exploring some of the issues confronting oligopolies. The chapter also explores the relationship between oligopolies and antitrust policy. Chapter Objectives Objective #1. Oligopolies are characterized as an industry in which there are a few producers. Each of these individual producers has some market power (like a monopoly) that enables them to affect market prices, but each of these producers also competes against the other producers in the industry. This competition is different from perfect competition in that each producer is aware of the other firms in the industry and recognizes that each firm's behavior affects the other firms. The key aspect of oligopoly is the tension between cooperation and competition: each firm must decide whether and to what degree it wants to cooperate or compete with the other firms in their industry. Objective #2. With an oligopolistic industry what matters is not the size of the firm, but rather the number of firms serving the industry. Oligopolies primarily exist because each firm benefits from increasing returns to scale and these returns to scale result in a few producers in the industry rather than many small-scale producers in the industry. Analysis of oligopoly presents several challenging puzzles not presented in our analysis of perfectly competitive markets or monopolies. Objective #3. The Herfindahl-Hirschman Index (HHI) allows economists to measure the degree of concentration in an industry. This index is the square of the share of market sales summed over the firms in the industry. An HHI greater than 1,800 indicates an oligopoly; an HHI between 1,000 and 1,800 indicates a somewhat competitive market; and an HHI less than 1,000 indicates a strongly competitive market. When a proposed merger is likely to significantly increase the HHI over 1,000, the merger is closely analyzed and is likely to be disallowed by government antitrust enforcement.

2 Objective #4. The simplest type of oligopoly to analyze is a duopoly, a situation in which there are only two firms in the industry. These two firms face two strategies: they can decide to cooperate with one another or they can decide to compete with each other by adopting noncooperative behavior. By cooperating and forming a cartel, these two firms can work together to select the level of output that will maximize their joint profits. Even with an agreement to cooperate, the firms will each find that they have an incentive to cheat on this arrangement. Cartels are inherently unstable because each firm recognizes that they have an incentive to produce more of the good than was agreed. Like a monopolist, each firm in an oligopoly recognizes that selling a greater amount of output creates both a quantity and a price effect; however, the price effect is smaller for the oligopolist than it is for the monopolist, which means that the marginal revenue from selling additional units of the good is higher for the oligopolist than it would be for the monopolist. Ultimately, collusion is more profitable than noncooperative behavior, but it is difficult to achieve since formal agreements to collude are illegal in many nations. Some oligopolies find ways to collude without a formal agreement. Objective #5. An oligopolist would prefer to have no firms to compete against. An oligopolist can create a monopoly through the establishment of exclusive dealing whereby the oligopolist provides the good to buyers who agree to only buy its product. This allows the oligopolist to have greater market power and therefore higher profits than it would earn if it faced competition from other firms. Alternatively, the oligopolistic firm can distinguish its product through differentiation: the more differentiated the firm's product, the closer the market structure is to monopoly. Objective #6. There are two basic types of oligopoly behavior based on production decisions and pricing decisions: (1) quantity competition, or Cournot behavior; and (2) price competition, or Bertrand behavior. With quantity competition, or Cournot behavior, the firms find it relatively easy to achieve an outcome that looks like collusion without having to make a formal agreement to collude. This oligopoly situation occurs when each firm lacks the ability to change quickly the level of output they produce. In such a setting, the firms in the oligopoly, constrained by the quantity of output they can produce, find it easier to divide the market, sell their product at a price greater than marginal cost, and earn positive economic profit. In this setting, the oligopolistic outcome resembles the monopoly outcome with regard to market price and market output.

3 With price competition, or Bertrand behavior, the firms find it relatively difficult to achieve an outcome that looks like collusion and instead find that each firm produces the quantity where price equals marginal cost, and the resultant market outcome is like perfect competition. In this situation, each firm's product is a perfect substitute for the' other firms' products, and each firm has the capacity to expand output quickly. Oligopolistic firms in this setting compete on price, and price falls until it reaches the level where price equals marginal cost. In this setting, the oligopolistic outcome resembles the perfectly competitive outcome with regard to market price and market output. Oligopolistic firms that lack an environment that imposes quantity constraints often differentiate their products to avoid direct price competition and its resultant outcome. The more differentiated its product, the more each firm resembles a monopoly. Objective #7. Oligopolistic firms are interdependent: one firm's profit depends on what its competitors do and vice versa. This interdependence can be modeled using game theory, in which a payoff matrix is constructed to represent the different outcomes that each firm achieves depending on the decisions made by the other firms. In this chapter, game theory is used to model this interdependence between two firms. The prisoner's dilemma is an example of game theory in which each player in the game has an incentive to cheat or take an action that benefits the player at the other player's expense, and the outcome of this behavior leaves both players worse off than they would have been if neither player had cheated. This example helps illustrate the peculiar, and often puzzling, behavior of oligopolistic firms. Figure 15.1 illustrates a payoff matrix between player 1 and player 2. Both players have a choice of two strategies-strategy 1 and strategy 2-and the payoff for each player is given in the individual cells, with player 1's payoff given first, followed by player 2's payoff.

4 Objective #8. A dominant strategy is a strategy that the player will adhere to no matter what the other players do. When each player takes the strategy that is best for them given the actions of the other players, this generates a game equilibrium that is referred to as a Nash equilibrium. The Nash equilibrium is a noncooperative equilibrium, since none of the players take into account the effects of their actions on the other players. Figure 15.2 illustrates a payoff matrix for two firms, firm 1 and firm 2, where both firms are deciding whether they should cooperate or compete with one another. Each cell provides information about the level of profits the firms earn depending on their strategy. Both firm 1 and firm 2 have dominant strategies: they will both compete, since their profit is greater when electing this strategy no matter what strategy the other firm chooses. However, when both firms select this strategy, their total profits fall below the level they could achieve if both firms were willing to commit to the strategy to cooperate. The Nash equilibrium for this game leaves both firms worse off than they would be if it were possible for them to creditably maintain the other strategy. Objective #9. Some games are played only once (Figure 15.2 is an example of this kind of game). These one-shot games do not offer the complexities found in games that are played multiple times. For businesses that hope to stay in business for many years, game theory suggests the need to consider strategic behavior that takes into account the impact of the firm's decision on the future actions of other players in the game. These multishot games often start with firms behaving cooperatively. When a firm deviates from cooperative behavior, the other firms may respond with a tit-for-tat strategy wherein they repeat what the other firm did in the previous period. This tit-for-tat strategy offers a reward to firms for cooperative behavior while punishing firms who opt to cheat on the other firms. Over time each firm recognizes that they are better off cooperating with the other firms in the industry rather than competing with these firms. When firms reach this point, this is referred to as tacit collusion, since the firms are implicitly colluding with one another without the necessity of a formal, explicit agreement.

5 Objective #10. The kinked demand curve model of oligopoly can be used to illustrate the tacit collusion outcome. The oligopolist produces the quantity associated with the tacit collusion outcome (Q*) and prices this quantity at P*, the tacitly agreed upon price. The oligopolist recognizes that a deviation from this outcome is likely to be punished by the other firms in the industry: producing a quantity greater than Q* will likely cause the other firms to produce a higher level of output and to sell this output at a lower price; and producing a lower level of output than Q* and selling this output at a price greater than P* will cause the firm to lose sales as the other firms continue to sell their output at P*. This knowledge of how rivals will respond to the firm's production and pricing decision results in the firm perceiving its demand curve has a kink in it that occurs at the level of output Q* and the price P*. Figure 15.3 illustrates the kinked demand curve model. Notice that the firm profit maximizes by producing the level of output where marginal revenue equals marginal cost (MR = MC), but that because of the kink in the demand curve there are many different MC curves (for example, MC 1 and MC 2 ) that will result in the firm producing Q* and. Selling each unit for P*. Objective #11. The United States legally restricts the behavior of oligopolistic firms and prohibits the creation of monopolies. The Sherman Antitrust Act of 1890 marks the beginning of antitrust policy and the government's commitment to prevent oligopolistic industries from becoming monopolies or behaving like a monopoly.

6 Objective #12. Although tacit collusion is common, it is hard for firms to push prices up to the monopoly level due to a number of different factors. Monopolistic prices are hard to achieve for at least four reasons: (1) when there are many firms in the industry, firms are less likely to behave cooperatively; (2) when firms produce a variety of products and offer these products at different prices it is hard to discern when a firm is cheating on the tacit agreement; (3) firms do not always agree on what is fair and in their interests, and this can lead to firms deviating from the tacit agreement; and (4) firms may find that the buyers of their products are large enough relative to the entire market to be able to bargain for lower prices. When tacit collusion breaks down, this is often due to price wars in which each firm reduces the price of its product below the cooperative level. In a worse-case scenario prices can fall below the noncooperative level as each seller tries to drive the other sellers out of the business. Objective #13. Another form of oligopolistic behavior is that of price leadership. Here a firm acts to set the price tacitly for the whole industry. In industries that follow a price leadership model, the firms often compete with each other with regard to other product characteristics. This nonprice competition injects competition into an otherwise cooperative environment.

7 Key Terms Notes oligopoly an industry with only a small number of producers. oligopolist a firm in an industry with only a small number of producers. imperfect competition a market structure in which no firm is a monopolist, but producers nonetheless have market power they can use to affect market prices. duopoly an oligopoly consisting of only two firms. duopolist one of the two firms in a duopoly. collusion cooperation among producers to limit production and raise prices so as to raise one another's profits. cartel an agreement among several producers to obey output restrictions in order to increase their joint profits. noncooperative behavior actions by firms that ignore the effects of those actions on the profits of other firms. interdependence the relationship among firms when their decisions significantly affect one another's profits; characteristic of oligopolies. game theory the study of behavior in situations of interdependence. Used to explain the behavior of an oligopoly. payoff in game theory, the reward received by a player (for example, the profit earned by an oligopolist). payoff matrix in game theory, a diagram that shows how the payoffs to each of the participants in a two-player game depend on the actions of both; a tool in analyzing interdependence. prisoner's dilemma a game based on two premises in which (1) each player has an incentive to choose an action that benefits itself at the other player's expense; and (2) both players are then worse off than if they had acted cooperatively.

8 dominant strategy in game theory, an action that is a player's best action regardless of the action taken by the other player. Nash equilibrium in game theory, the equilibrium that results when all players choose the action that maximizes their payoffs given the actions of other players, ignoring the effect of that action on the payoffs of other players; also known as noncooperative equilibrium. noncooperative equilibrium in game theory, the equilibrium that results when all players choose the action that maximizes their payoffs given the actions of other players, ignoring the effect of that action on the payoffs of other players; also known as Nash equilibrium. strategic behavior actions taken by a firm that attempt to influence the future behavior of other firms. tit for tat in game theory, a strategy that involves playing cooperatively at first, then doing whatever the other player did in the previous period. tacit collusion cooperation among producers, without a formal agreement, to limit production and raise prices so as to raise one anothers' profits. kinked demand curve a model used to explain the stability of oligopoly pricing; a demand curve that kinks (bends) because the oligopolist will lose sales if output is reduced and price is increased but gain only a few additional sales if output is increased and price is lowered (because the lower price will be matched at once by other oligopolists), the curve will be very flat above the kink and very steep below the kink.

9 antitrust policy legislative and regulatory efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies. price war a collapse of prices when tacit collusion breaks down. product differentiation the attempt by firms to convince buyers that their products are different from those of other firms in the industry. If firms can so convince buyers, they can charge a higher price. price leadership a pattern of behavior in which one firm sets its price and other firms in the industry follow. nonprice competition competition in areas other than price to increase sales, such as new product features and advertising; especially engaged in by firms that have a tacit understanding not to compete on price.

10 AFTER YOU READ THE CHAPTER Tips Tip #1. Students often find reading a payoff matrix challenging. Here's a suggestion for making this task easier. First, consider the payoff matrix from player l's perspective as two separate columns: each column represents player 2 taking a particular strategy and sticking with it, while player l's task is to decide which of the available strategies is the best strategy for player 1 to pursue. For example, Figure 15.4 represents the payoff matrix given in Figure 15.2 from firm 1's perspective. Now, consider the payoff matrix from player 2's perspective as two separate rows: each row represents player 1 taking a particular strategy and sticking with it, while player 2's task is to decide which of the available strategies is the best strategy for player 2 to pursue. Figure 15.5 represents the payoff matrix given in Figure 15.2 from firm 2's perspective.

11 Tip #2. This chapter presents the kinked demand curve model. It is important that you understand why there is a kink in the demand curve for the oligopolistic firm. Use Figure 15.6 to help guide your thinking on this issue. In the kinked demand curve model, it is assumed that the firms tacitly agree to collude and that each firm will set price at P* and produce Q* units of the good. Figure 15.6 illustrates this situation for an oligopolistic firm. This firm essentially views its demand curve as having two components: D 1 and D 2. If the firm drops the price below P*, then the relevant demand curve for the firm to consider is D 2, and if the firm increases the price above P*, then the relevant demand curve for the firm to consider is D 1. This oligopolistic firm realizes that a decision to decrease its price below the tacitly agreed upon price will cause the other firms to retaliate. These firms will also drop their price, and all the firms will sell more units of the good but not as many units as would have been the case if only one firm dropped the price. The firm also realizes that the decision to raise the price above P* will cause the demand for its product to fall by a relatively larger amount (compare the effect of a price increase on the quantity demanded on demand curve D 1 versus demand curve D 2 ) as consumers opt to purchase the good from the other firms that are still providing the good at P*.

12 Tip #3. A second concept to understand with regard to the kinked demand curve model is that firms can have different MC curves and still opt to produce Q* units of the good and sell this quantity at P*. The vertical segment of the MR curve makes this a possibility, and it implies that firms with very different MC curves can abide by the same quantity and pricing decision. Tip #4. This chapter entails less certainty about how the market structure works relative to the chapters on perfect competition and monopoly. After you study the chapter and work through the problems, you should have an appreciation for the puzzles presented by the oligopolistic market structure. These puzzles typically reflect the trade-offs between cooperation and competition and the benefits firms receive from these two strategies.

29/02/2016. Market structure II- Other types of imperfect competition. What Is Monopolistic Competition? OTHER TYPES OF IMPERFECT COMPETITION

29/02/2016. Market structure II- Other types of imperfect competition. What Is Monopolistic Competition? OTHER TYPES OF IMPERFECT COMPETITION Market structure II- Other types of imperfect competition OTHER TYPES OF IMPERFECT COMPETITION Characteristics of Monopolistic Competition Monopolistic competition is a market structure in which many firms

More information

Principles of Microeconomics Assignment 8 (Chapter 10) Answer Sheet. Class Day/Time

Principles of Microeconomics Assignment 8 (Chapter 10) Answer Sheet. Class Day/Time 1 Principles of Microeconomics Assignment 8 (Chapter 10) Answer Sheet Name Class Day/Time Questions of this homework are in the next few pages. Please find the answer of the questions and fill in the blanks

More information

Oligopoly. Quantity Price(per year) 0 $120 2,000 $100 4,000 $80 6,000 $60 8,000 $40 10,000 $20 12,000 $0

Oligopoly. Quantity Price(per year) 0 $120 2,000 $100 4,000 $80 6,000 $60 8,000 $40 10,000 $20 12,000 $0 Oligopoly 1. Markets with only a few sellers, each offering a product similar or identical to the others, are typically referred to as a. monopoly markets. b. perfectly competitive markets. c. monopolistically

More information

Chapter 15: Industrial Organization

Chapter 15: Industrial Organization Chapter 15: Industrial Organization Imperfect Competition Product Differentiation Advertising Monopolistic Competition Oligopoly Collusion Cournot Model Stackelberg Model Bertrand Model Cartel Legal Provisions

More information

2007 Thomson South-Western

2007 Thomson South-Western BETWEEN MONOPOLY AND PERFECT COMPETITION Imperfect competition refers to those market structures that fall between perfect competition and pure monopoly. Imperfect competition includes industries in which

More information

Use the following to answer question 4:

Use the following to answer question 4: Homework Chapter 11: Name: Due Date: Wednesday, December 4 at the beginning of class. Please mark your answers on a Scantron. It is late if your Scantron is not complete when I ask for it at 9:35. Get

More information

11. Oligopoly. Literature: Pindyck and Rubinfeld, Chapter 12 Varian, Chapter 27

11. Oligopoly. Literature: Pindyck and Rubinfeld, Chapter 12 Varian, Chapter 27 11. Oligopoly Literature: Pindyck and Rubinfeld, Chapter 12 Varian, Chapter 27 04.07.2017 Prof. Dr. Kerstin Schneider Chair of Public Economics and Business Taxation Microeconomics Chapter 11 Slide 1 Chapter

More information

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output.

Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry s output. Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Econ 203 Topic 8 page 1 Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry

More information

Monopolistic Competition Oligopoly Duopoly Monopoly. The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Monopolistic Competition Oligopoly Duopoly Monopoly. The further right on the scale, the greater the degree of monopoly power exercised by the firm. Oligopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm. Imperfect competition refers to those market

More information

Figure: Computing Monopoly Profit

Figure: Computing Monopoly Profit Name: Date: 1. Compared to perfect competition: A) monopoly produces more at a lower price. B) monopoly produces where MR > MC, and a perfectly competitively firm produces where P = MC. C) monopoly may

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Review 10-14-15 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1. The four-firm concentration ratio equals the percentage of the value of accounted

More information

14.1 Comparison of Market Structures

14.1 Comparison of Market Structures 14.1 Comparison of Structures Chapter 14 Oligopoly 14-2 14.2 Cartels Cartel in Korea Oligopolistic firms have an incentive to collude, coordinate setting their prices or quantities, so as to increase their

More information

Introduction. Learning Objectives. Learning Objectives. Chapter 27. Oligopoly and Strategic Behavior

Introduction. Learning Objectives. Learning Objectives. Chapter 27. Oligopoly and Strategic Behavior Chapter 27 Oligopoly and Introduction On a typical day, United Parcel Service will transport over 10 million packages. UPS and its main rival, FedEx Ground, earn more than three-fourths of total revenue

More information

Lecture 11 Imperfect Competition

Lecture 11 Imperfect Competition Lecture 11 Imperfect Competition Business 5017 Managerial Economics Kam Yu Fall 2013 Outline 1 Introduction 2 Monopolistic Competition 3 Oligopoly Modelling Reality The Stackelberg Leadership Model Collusion

More information

Syllabus item: 57 Weight: 3

Syllabus item: 57 Weight: 3 1.5 Theory of the firm and its market structures - Monopoly Syllabus item: 57 Weight: 3 Main idea 1 Monopoly: - Only one firm producing the product (Firm = industry) - Barriers to entry or exit exists,

More information

INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition

INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY. Monopolistic Competition 13-1 INTERMEDIATE MICROECONOMICS LECTURE 13 - MONOPOLISTIC COMPETITION AND OLIGOPOLY Monopolistic Competition Pure monopoly and perfect competition are rare in the real world. Most real-world industries

More information

AP Microeconomics. Content Skills Learning Targets Assessment Resources & Technology

AP Microeconomics. Content Skills Learning Targets Assessment Resources & Technology St. Michael Albertville High School Teacher: Matthew Rooker AP Microeconomics October 2014 Content Skills Learning Targets Assessment Resources & Technology November 2014 Content Skills Learning Targets

More information

The Analysis of Competitive Markets

The Analysis of Competitive Markets C H A P T E R 12 The Analysis of Competitive Markets Prepared by: Fernando & Yvonn Quijano CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus

More information

ECON December 4, 2008 Exam 3

ECON December 4, 2008 Exam 3 Name Portion of ID# Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. A fundamental source of monopoly market power arises from a. perfectly

More information

Eco201 Review questions for chapters Prof. Bill Even ====QUESTIONS FOR CHAPTER 13=============================

Eco201 Review questions for chapters Prof. Bill Even ====QUESTIONS FOR CHAPTER 13============================= Eco201 Review questions for chapters 13-15 Prof. Bill Even ====QUESTIONS FOR CHAPTER 13============================= 1) A monopoly has two key features, which are. A) barriers to entry and close substitutes

More information

Oligopoly Pricing. EC 202 Lecture IV. Francesco Nava. January London School of Economics. Nava (LSE) EC 202 Lecture IV Jan / 13

Oligopoly Pricing. EC 202 Lecture IV. Francesco Nava. January London School of Economics. Nava (LSE) EC 202 Lecture IV Jan / 13 Oligopoly Pricing EC 202 Lecture IV Francesco Nava London School of Economics January 2011 Nava (LSE) EC 202 Lecture IV Jan 2011 1 / 13 Summary The models of competition presented in MT explored the consequences

More information

AQA Economics A-level

AQA Economics A-level AQA Economics A-level Microeconomics Topic 5: Perfect Competition, Imperfectly Competitive Markets and Monopoly 5.5 Oligopoly Notes Characteristics of an oligopoly: High barriers to entry and exit There

More information

Chapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved.

Chapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION. Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. Chapter 14 TRADITIONAL MODELS OF IMPERFECT COMPETITION Copyright 2005 by South-Western, a division of Thomson Learning. All rights reserved. 1 Pricing Under Homogeneous Oligopoly We will assume that the

More information

Chapter 12. Oligopoly. Oligopoly Characteristics. ) of firms Product differentiation may or may not exist ) to entry. Chapter 12 2

Chapter 12. Oligopoly. Oligopoly Characteristics. ) of firms Product differentiation may or may not exist ) to entry. Chapter 12 2 Chapter Oligopoly Oligopoly Characteristics ( ) of firms Product differentiation may or may not exist ( ) to entry Chapter Oligopoly Equilibrium ( ) Equilibrium Firms are doing the best they can and have

More information

Microeconomics (Oligopoly & Game, Ch 12)

Microeconomics (Oligopoly & Game, Ch 12) Microeconomics (Oligopoly & Game, Ch 12) Lecture 17-18, (Minor 2 coverage until Lecture 18) Mar 16 & 20, 2017 CHAPTER 12 OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4

More information

Unit 4: Imperfect Competition

Unit 4: Imperfect Competition Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

More information

Market Structure & Imperfect Competition

Market Structure & Imperfect Competition In the Name of God Sharif University of Technology Graduate School of Management and Economics Microeconomics (for MBA students) 44111 (1393-94 1 st term) - Group 2 Dr. S. Farshad Fatemi Market Structure

More information

Unit 4: Imperfect Competition

Unit 4: Imperfect Competition Unit 4: Imperfect Competition 1 Monopoly 2 Characteristics of Monopolies 3 5 Characteristics of a Monopoly 1. Single Seller One Firm controls the vast majority of a market The Firm IS the Industry 2. Unique

More information

Oligopolies Part III

Oligopolies Part III Oligopolies Part III It's called an oligopoly. It's not a regular market. It's a market in which they control the prices and they've been doing it for years. Richard Miller The Prisoner s Dilemma Consider

More information

QOD #: 29: Graphing Practice w/ Mr. Clifford

QOD #: 29: Graphing Practice w/ Mr. Clifford LO1 10-1 AGENDA Thurs 10/29 Regulated Monopoly (FRQ 2011 & 2012) QOD #: 29: Graphing Practice w/ Mr. Clifford Price Discriminating Monopoly Monopolistic Competition & Oligopoly CH 8/9 Results/TC & Retakes

More information

AP Microeconomics Review Session #3 Key Terms & Concepts

AP Microeconomics Review Session #3 Key Terms & Concepts The Firm, Profit, and the Costs of Production 1. Explicit vs. implicit costs 2. Short-run vs. long-run decisions 3. Fixed inputs vs. variable inputs 4. Short-run production measures: be able to calculate/graph

More information

Perfect Competition. Chapter 7 Section Main Menu

Perfect Competition. Chapter 7 Section Main Menu Perfect Competition What conditions must exist for perfect competition? What are barriers to entry and how do they affect the marketplace? What are prices and output like in a perfectly competitive market?

More information

! lecture 7:! competition and collusion!!

! lecture 7:! competition and collusion!! ! lecture 7:! competition and collusion!! the story so far Natural monopoly: Definitions (Ideal) Pricing solutions Regulation in practice Regulation under asymmetric information Competition policy: Introduction

More information

Chapter 13. Oligopoly and Monopolistic Competition

Chapter 13. Oligopoly and Monopolistic Competition Chapter 13 Oligopoly and Monopolistic Competition Chapter Outline Some Specific Oligopoly Models : Cournot, Bertrand and Stackelberg Competition When There are Increasing Returns to Scale Monopolistic

More information

Principles of Microeconomics Module 5.1. Understanding Profit

Principles of Microeconomics Module 5.1. Understanding Profit Principles of Microeconomics Module 5.1 Understanding Profit 180 Production Choices of Firms All firms have one goal in mind: MAX PROFITS PROFITS = TOTAL REVENUE TOTAL COST Two ways to reach this goal:

More information

Recall from last time. Econ 410: Micro Theory. Cournot Equilibrium. The plan for today. Comparing Cournot, Stackelberg, and Bertrand Equilibria

Recall from last time. Econ 410: Micro Theory. Cournot Equilibrium. The plan for today. Comparing Cournot, Stackelberg, and Bertrand Equilibria Slide Slide 3 Recall from last time A Nash Equilibrium occurs when: Econ 40: Micro Theory Comparing Cournot, Stackelberg, and Bertrand Equilibria Monday, December 3 rd, 007 Each firm s action is a best

More information

C H A P T E R 12. Monopolistic Competition and Oligopoly CHAPTER OUTLINE

C H A P T E R 12. Monopolistic Competition and Oligopoly CHAPTER OUTLINE C H A P T E R 12 Monopolistic Competition and Oligopoly CHAPTER OUTLINE 12.1 Monopolistic Competition 12.2 Oligopoly 12.3 Price Competition 12.4 Competition versus Collusion: The Prisoners Dilemma 12.5

More information

Do not open this exam until told to do so. Solution

Do not open this exam until told to do so. Solution Do not open this exam until told to do so. Department of Economics College of Social and Applied Human Sciences K. Annen, Fall 003 Final (Version): Intermediate Microeconomics (ECON30) Solution Final (Version

More information

Unit 4: Imperfect Competition

Unit 4: Imperfect Competition Unit 4: Imperfect Competition 1 FOUR MARKET STRUCTURES Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly Imperfect Competition Every product is sold in a market that can be considered

More information

Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models

Managerial Economics & Business Strategy Chapter 9. Basic Oligopoly Models Managerial Economics & Business Strategy Chapter 9 Basic Oligopoly Models Overview I. Conditions for Oligopoly? II. Role of Strategic Interdependence III. Profit Maximization in Four Oligopoly Settings

More information

ECON 230D2-002 Mid-term 1. Student Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 230D2-002 Mid-term 1. Student Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 230D2-002 Mid-term 1 Name Student Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Scenario 12.3: Suppose a stream is discovered whose

More information

Monopolistic Competition

Monopolistic Competition Monopolistic Competition CHAPTER16 C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Describe and identify monopolistic competition. 2 Explain how

More information

ECON 2100 (Summer 2016 Sections 10 & 11) Exam #3C

ECON 2100 (Summer 2016 Sections 10 & 11) Exam #3C ECON 21 (Summer 216 Sections 1 & 11) Exam #3C Multiple Choice Questions: (3 points each) 1. I am taking of the exam. C. Version C 2. is a market structure in which there is one single seller of a unique

More information

Lecture 22. Oligopoly & Monopolistic Competition

Lecture 22. Oligopoly & Monopolistic Competition Lecture 22. Oligopoly & Monopolistic Competition Course Evaluations on Thursday: Be sure to bring laptop, smartphone, or tablet with browser, so that you can complete your evaluation in class. Oligopoly

More information

Econ Microeconomic Analysis and Policy

Econ Microeconomic Analysis and Policy ECON 500 Microeconomic Theory Econ 500 - Microeconomic Analysis and Policy Monopoly Monopoly A monopoly is a single firm that serves an entire market and faces the market demand curve for its output. Unlike

More information

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen November 7, Lecture 22 Monopoly. Principles of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly Outline. Chap : Monopoly. Chap : Shift in Demand and Effect of Tax Monopoly The monopolist is the single supply-side

More information

Perfect Competition Chapter 7 Section 1

Perfect Competition Chapter 7 Section 1 Perfect Competition Chapter 7 Section 1 Four Conditions of Perfect Perfect competition is a market structure in which a large number of firms all produce the same product. Many buyers and sellers Identical

More information

Market Structure. Oligopoly

Market Structure. Oligopoly Market Structure Oligopoly Characteristics of Oligopoly The government does not intervene into the operations of the oligopolistically competitive firm in the market unless the oligopolist violates the

More information

ECONOMICS. Paper 3 : Fundamentals of Microeconomic Theory Module 28 : Non collusive and Collusive model

ECONOMICS. Paper 3 : Fundamentals of Microeconomic Theory Module 28 : Non collusive and Collusive model Subject Paper No and Title Module No and Title Module Tag 3 : Fundamentals of Microeconomic Theory 28 : Non collusive and Collusive model ECO_P3_M28 TABLE OF CONTENTS 1. Learning Outcomes 2. Introduction

More information

Chapter 7 Notes 20. Chapter 7 Vocab Practice 32. Be An Entrepreneur 30. Chapter 8 Notes 20. Cooperative Business Notes 20

Chapter 7 Notes 20. Chapter 7 Vocab Practice 32. Be An Entrepreneur 30. Chapter 8 Notes 20. Cooperative Business Notes 20 Name: Period: Week: 28 29 Dates: 3/2-3/16 Unit: Markets & Business Organizations Chapters: 7 8 Monday Tuesday Wednesday Thursday Friday 2 O *Chapter 7 9 E *Ch 8 *Cooperative Business Organization 3 E 4

More information

FOUR MARKET MODELS. Characteristics of Oligopolies:

FOUR MARKET MODELS. Characteristics of Oligopolies: FOUR MARKET MODELS Perfect Competition Monopolistic Competition Oligopoly Pure Monopoly Characteristics of Oligopolies: A Few Large Producers (Less than 10) Identical or Differentiated Products High Barriers

More information

ECN 3103 INDUSTRIAL ORGANISATION

ECN 3103 INDUSTRIAL ORGANISATION ECN 3103 INDUSTRIAL ORGANISATION 5. Game Theory Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016 OUR PLAN Analyze Strategic price and Quantity Competition (Noncooperative Oligopolies)

More information

COST OF PRODUCTION & THEORY OF THE FIRM

COST OF PRODUCTION & THEORY OF THE FIRM MICROECONOMICS: UNIT III COST OF PRODUCTION & THEORY OF THE FIRM One of the concepts mentioned in both Units I and II was and its components, total cost and total revenue. In this unit, costs and revenue

More information

Microeconomics LESSON 6 ACTIVITY 40

Microeconomics LESSON 6 ACTIVITY 40 Microeconomics LESSON 6 ACTIVITY 40 Monopolistic Competition Figure 40.1 Monopolistically Competitive Firm in the Short Run MC COSTS/REVENUE (DOLLARS) E D C B A F H K G ATC D 0 MR L M QUANTITY 1. Use Figure

More information

Section I (20 questions; 1 mark each)

Section I (20 questions; 1 mark each) Foundation Course in Managerial Economics- Solution Set- 1 Final Examination Marks- 100 Section I (20 questions; 1 mark each) 1. Which of the following statements is not true? a. Societies face an important

More information

17 REGULATION AND ANTITRUST LAW. Chapter. Key Concepts

17 REGULATION AND ANTITRUST LAW. Chapter. Key Concepts Chapter 17 REGULATION AND ANTITRUST LAW Key Concepts Market Intervention Regulation consists of rules administered by a government agency to that determine prices, product standards and types, and conditions

More information

OLIGOPOLY. After studying this chapter, you will be able to:

OLIGOPOLY. After studying this chapter, you will be able to: After studying this chapter, you will be able to: Define and identify oligopoly Use game theory to explain how price and output are determined in oligopoly Use game theory to explain other strategic decisions

More information

Microeconomics. More Tutorial at

Microeconomics.  More Tutorial at Microeconomics 1. Suppose a firm in a perfectly competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What would be the firm s total revenue if it instead produced

More information

Lecture 5 Competition, Monopoly, Monopolistic Competition and Oligopoly

Lecture 5 Competition, Monopoly, Monopolistic Competition and Oligopoly Lecture 5 Competition, Monopoly, Monopolistic Competition and Oligopoly 1 Overview Firm supply decisions in a perfectly competitive market Short run supply Long run supply Competitive equilibrium Monopoly

More information

Chapter 12. Oligopoly. Oligopoly Characteristics. Oligopoly Equilibrium

Chapter 12. Oligopoly. Oligopoly Characteristics. Oligopoly Equilibrium Chapter Oligopoly Oligopoly Characteristics Small number of firms Product differentiation may or may not eist Barriers to entry Chapter Oligopoly Equilibrium Defining Equilibrium Firms are doing the best

More information

Chapter 7: Market Structures

Chapter 7: Market Structures SCHS SOCIAL STUDIES What you need to know UNIT THREE 1. Describe 4 conditions that are in place for a perfectly competitive market 2. Describe and give characteristics of a monopoly 3. Describe and give

More information

Chapter 9: Static Games and Cournot Competition

Chapter 9: Static Games and Cournot Competition Chapter 9: Static Games and Cournot Competition Learning Objectives: Students should learn to:. The student will understand the ideas of strategic interdependence and reasoning strategically and be able

More information

Collusion. Sotiris Georganas. February Sotiris Georganas () Collusion February / 31

Collusion. Sotiris Georganas. February Sotiris Georganas () Collusion February / 31 Collusion Sotiris Georganas February 2012 Sotiris Georganas () Collusion February 2012 1 / 31 Outline 1 Cartels 2 The incentive for cartel formation The scope for collusion in the Cournot model 3 Game

More information

Overview 11/6/2014. Herfindahl Hirshman index of market concentration ...

Overview 11/6/2014. Herfindahl Hirshman index of market concentration ... Overview Market Structure and Competition Chapter 3 explores different types of market structures. Markets differ on two important dimensions: the number of firms, and the nature of product differentiation.

More information

Lesson 3-2 Profit Maximization

Lesson 3-2 Profit Maximization Lesson 3-2 rofit Maximization E: What is a Market Graph? 13-3 (4) Standard 3b: Students will explain the 5 dimensions of market structure and identify how perfect competition, monopoly, monopolistic competition,

More information

Chapter 10: Monopoly

Chapter 10: Monopoly Chapter 10: Monopoly Answers to Study Exercise Question 1 a) horizontal; downward sloping b) marginal revenue; marginal cost; equals; is greater than c) greater than d) less than Question 2 a) Total revenue

More information

Managerial Economics Chapter 9 Practice Question

Managerial Economics Chapter 9 Practice Question ECO 3320 Lanlan Chu Managerial Economics Chapter 9 Practice Question 1. The market for widgets consists of two firms that produce identical products. Competition in the market is such that each of the

More information

CHAPTER 6: Monopoly and Imperfect Competition

CHAPTER 6: Monopoly and Imperfect Competition CHAPTER 6: Monopoly and Imperfect Competition 1a. Column 1 (price): -, 2, 2, 2, 2; Column 2 (quantity): 0, 1000, 2000, 3000, 4000; Column 3 (total revenue): 0, 2000, 4000, 6000, 8000; Column 4 (marginal

More information

Chapter 7. Section 3: Monopolist Competition & Oligopoly

Chapter 7. Section 3: Monopolist Competition & Oligopoly Chapter 7 Section 3: Monopolist Competition & Oligopoly Monopolist Competition Many companies compete in an open market to sell products that are similar but not identical Each firms hold a monopoly over

More information

Contents in Brief. Preface

Contents in Brief. Preface Contents in Brief Preface Page v PART 1 INTRODUCTION 1 Chapter 1 Nature and Scope of Managerial Economics and Finance 3 Chapter 2 Equations, Graphs and Optimisation Techniques 21 Chapter 3 Demand, Supply

More information

Extra Credit. Student:

Extra Credit. Student: Extra Credit Student: 1. A glass company making windows for houses also makes windows for other things (cars, boats, planes, etc.). We would expect its supply curve for house windows to be: A. Dependent

More information

AGEC 3333 Practice Questions for Exam 3 Fall Semester, 2009 Set A: Material From Chapter 10, Pages ,

AGEC 3333 Practice Questions for Exam 3 Fall Semester, 2009 Set A: Material From Chapter 10, Pages , (1) (from page 108) Match each industry description with the proper identification by drawing a line between the description and identification. a market with many buyers and sellers with roughly equal

More information

Merger Analysis and Anti-Trust

Merger Analysis and Anti-Trust Merger Analysis and Anti-Trust Merger: The process in which two or more independently owned firms join under the same ownership. This process could be a merger, takeover, integration, or acquisition. It

More information

FINALTERM EXAMINATION FALL 2006

FINALTERM EXAMINATION FALL 2006 FINALTERM EXAMINATION FALL 2006 QUESTION NO: 1 (MARKS: 1) - PLEASE CHOOSE ONE Compared to the equilibrium price and quantity sold in a competitive market, a monopolist Will charge a price and sell a quantity.

More information

CHAPTER 8: SECTION 1 A Perfectly Competitive Market

CHAPTER 8: SECTION 1 A Perfectly Competitive Market CHAPTER 8: SECTION 1 A Perfectly Competitive Market Four Types of Markets A market structure is the setting in which a seller finds itself. Market structures are defined by their characteristics. Those

More information

Industrial Organization- micro : Price discrimination in oligopoly

Industrial Organization- micro : Price discrimination in oligopoly Industrial Organization- micro 3 2018: Price discrimination in oligopoly Price discrimination is a mechanism whereby a monopolist can effectively shift surplus from the consumer sector. With perfect price

More information

Edexcel (A) Economics A-level

Edexcel (A) Economics A-level Edexcel (A) Economics A-level Theme 3: Business Behaviour & the Labour Market 3.4 Market Structures 3.4.4 Oligopoly Notes Characteristics of an oligopoly: High barriers to entry and exit There are high

More information

Best-response functions, best-response curves. Strategic substitutes, strategic complements. Quantity competition, price competition

Best-response functions, best-response curves. Strategic substitutes, strategic complements. Quantity competition, price competition Strategic Competition: An overview The economics of industry studying activities within an industry. Basic concepts from game theory Competition in the short run Best-response functions, best-response

More information

Contents. Concepts of Revenue I-13. About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11

Contents. Concepts of Revenue I-13. About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11 Contents About the authors I-5 Preface I-7 Syllabus I-9 Chapter-heads I-11 1 Concepts of Revenue 1.1 Introduction 1 1.2 Concepts of Revenue 2 1.3 Revenue curves under perfect competition 3 1.4 Revenue

More information

Experiential Learning Through Classroom Experiments David Bowes, Southeastern Louisiana University Jay Johnson, Southeastern Louisiana University

Experiential Learning Through Classroom Experiments David Bowes, Southeastern Louisiana University Jay Johnson, Southeastern Louisiana University Experiential Learning Through Classroom Experiments David Bowes, Southeastern Louisiana University Jay Johnson, Southeastern Louisiana University ABSTRACT This paper describes classroom experiments in

More information

Oligopoly is a market structure in which Natural or legal barriers prevent the entry of new firms. A small number of firms compete.

Oligopoly is a market structure in which Natural or legal barriers prevent the entry of new firms. A small number of firms compete. CHAPTER 15: OLIGOPOLY What Is Oligopoly? Oligopoly is a market structure in which Natural or legal barriers prevent the entry of new firms. A small number of firms compete. Barriers to Entry Either natural

More information

Economics for Educators

Economics for Educators Economics for Educators Lesson 7 and 5E Model Revised Edition Robert F. Hodgin, Ph.D. ii Economics for Educators, Revised Copyright 2012 All Rights Reserved 35 Economics for Educators, Revised Lesson 7:

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Micro - HW 4 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In central Florida during the spring, strawberry growers are price takers. The reason

More information

LESSON FIVE MAINTAINING COMPETITION

LESSON FIVE MAINTAINING COMPETITION LESSON FIVE MAINTAINING COMPETITION LESSON DESCRIPTION This lesson introduces the rationale for maintaining and strengthening competition, and illustrates the U.S. experience with antitrust laws and other

More information

Introduction to Agricultural Economics Agricultural Economics 105 Spring 2012 Second Hour Exam Version 1

Introduction to Agricultural Economics Agricultural Economics 105 Spring 2012 Second Hour Exam Version 1 Name Introduction to Agricultural Economics Agricultural Economics 105 Spring 2012 Second Hour Exam Version 1 There is only ONE correct answer per multiple choice question. Please put your answer on the

More information

Chart: Initial Conditions in Computer Market

Chart: Initial Conditions in Computer Market Oligopolies Part II It's called an oligopoly. It's not a regular market. It's a market in which they control the prices and they've been doing it for years. Richard Miller Oligopoly Behavior Market structure

More information

VIII 1 TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES. I. Monopoly - Single Firm With No Threat of Close Competition. Other Industry Structures

VIII 1 TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES. I. Monopoly - Single Firm With No Threat of Close Competition. Other Industry Structures TOPIC VIII: MONOPOLY AND OTHER INDUSTRY STRUCTURES I. Monopoly - Single Firm With No Threat of Close Competition II. Other Industry Structures CONCEPTS AND PRINCIPLES MONOPOLY We now consider the opposite

More information

Chapter 1: Introduction to Quantitative Techniques for Competition Policy. Quantitative Methods for Competition and Regulation Albert Banal-Estanol

Chapter 1: Introduction to Quantitative Techniques for Competition Policy. Quantitative Methods for Competition and Regulation Albert Banal-Estanol Chapter 1: Introduction to Quantitative Techniques for Competition Policy Quantitative Methods for Competition and Regulation Quantitative Techniques in Competition Policy The use of QT has a longer tradition

More information

Managerial Economics & Business Strategy. Game Theory: Inside Oligopoly

Managerial Economics & Business Strategy. Game Theory: Inside Oligopoly Managerial Economics & Business Strategy Chapter 10 Game Theory: Inside Oligopoly Revised 2/12 by DF McGraw-Hill/Irwin Copyright Copyright 2006 by The 2006 McGraw-Hill by The McGraw-Hill Companies, Inc.

More information

Monopolistic Competition. Chapter 17

Monopolistic Competition. Chapter 17 Monopolistic Competition Chapter 17 The Four Types of Market Structure Number of Firms? Many firms One firm Few firms Differentiated products Type of Products? Identical products Monopoly Oligopoly Monopolistic

More information

Market Structures. Perfect competition Monopolistic Competition Oligopoly Monopoly

Market Structures. Perfect competition Monopolistic Competition Oligopoly Monopoly Market Structures The classification of market structures can be arranged along a continuum, ranging from perfect competition, the most competitive market, to monopoly, the lease competitive: Perfect competition

More information

Short run and long run price and output decisions of a monopoly firm,

Short run and long run price and output decisions of a monopoly firm, 1 Chapter 1-Theory of Monopoly Syllabus-Concept of imperfect competition, Short run and long run price and output decisions of a monopoly firm, Concept of a supply curve under monopoly, comparison of perfect

More information

Tutor2u A2 Business Economics Glossary

Tutor2u A2 Business Economics Glossary Tutor2u A2 Business Economics Glossary Concept Abnormal profit Agency problem Allocative efficiency Anti-competitive behaviour Asymmetric information Average cost Average cost pricing Average fixed cost

More information

ECMC02H Intermediate Microeconomics - Topics in Price Theory

ECMC02H Intermediate Microeconomics - Topics in Price Theory 1 ECMC02H Intermediate Microeconomics - Topics in Price Theory Answers to the Term Test June 23, 2010 Version A of the test Your name (Print clearly and underline your last name) Your student number 1.

More information

Chapter 13. Game Theory. Gaming and Strategic Decisions. Noncooperative v. Cooperative Games

Chapter 13. Game Theory. Gaming and Strategic Decisions. Noncooperative v. Cooperative Games Chapter 13 Game Theory Gaming and Strategic Decisions Game theory tries to determine optimal strategy for each player Strategy is a rule or plan of action for playing the game Optimal strategy for a player

More information

Final Exam Study Questions:

Final Exam Study Questions: Final Exam Study Questions: Practice Multiple-Choice Questions 1. If a consumer purchases only two goods (X and Y ) and the demand for X is elastic, then a rise in the price of X a. will cause total spending

More information

Imperfect Competition

Imperfect Competition Imperfect Competition 6.1 There are only two firms producing a particular product. The demand for the product is given by the relation p = 24 Q, where p denotes the price (in dollars per unit) and Q denotes

More information

13 C H A P T E R O U T L I N E

13 C H A P T E R O U T L I N E PEARSON PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N CASE FAIR OSTER Prepared by: Fernando Quijano w/shelly Tefft 2of 37 PART III MARKET IMPERFECTIONS AND THE ROLE OF GOVERNMENT Monopoly

More information

Economics 110 Final exam Practice Multiple Choice Qs Fall 2013

Economics 110 Final exam Practice Multiple Choice Qs Fall 2013 Final Exam Practice Multiple Choice Questions - ANSWER KEY Which of the following statements is not correct? a. Monopolistic competition is similar to monopoly because in each market structure the firm

More information

Tutor2u Economics Essay Plans Summer 2002

Tutor2u Economics Essay Plans Summer 2002 Microeconomics Revision Essay (7) Perfect Competition and Monopoly (a) Explain why perfect competition might be expected to result in an allocation of resources which is both productively and allocatively

More information