Cat’s names are ROBIN and WILLS.
Chapter 16 – Oligopoly
- Few sellers, usually big firms (think Coke and Pepsi)
- Nearly identical products
- One firm’s decisions affect another firm’s profits
- An oligopoly with two members.
If they were co-operative, they would agree on a monopoly outcome, split production at 30 barrels
each, and each make a maximum profit of $1800.
- An agreement among firms in a market about quantities to produce or prices to charge.
- Form a
- Group of firms acting in unison If cheating in this cartel occurs, then they will come to an equilibrium that is suboptimal. They won’t be
selling at Q to maximize profits. They reach Nash equilibrium:
- A situation in which economic actors interacting with one another each choose their best
strategy given the strategies that all the others have chosen.
- Always results in a suboptimal outcome.
Monopoly Price > Oligopoly Price > Perfect Competition Price
Perfect Competition Quantity > Oligopoly Quantity > Monopoly Quantity
When the number of oligopoly sellers increases, it approaches a competitive market, price approaches
marginal cost, and quantity approaches socially efficient level.
Price and Output Effects
Increasing output has two effects:
- Output effect:
o If P>MC, selling more raises profits
- Price Effect:
o Raising production causes Q increase, which causes P decrease and reduces profit.
- If output effect > price effect
o The firm increases production
- If price effect > output effect
o The firm reduces production
- Study of how people behave in strategic situations
- Provides insight into the difficulty in maintainin