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Chapter 16 - Oligopoly.docx

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Hannah Holmes

Cat’s names are ROBIN and WILLS. Chapter 16 – Oligopoly Oligopoly has: - Few sellers, usually big firms (think Coke and Pepsi) - Nearly identical products - One firm’s decisions affect another firm’s profits Duopoly - An oligopoly with two members. - Example: 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. Collusion - An agreement among firms in a market about quantities to produce or prices to charge. - Form a Cartel - 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 Game Theory - Study of how people behave in strategic situations Prisoner’s Dilemma - Provides insight into the difficulty in maintainin
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