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Lecture: Characteristics of Oligopoly

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ECON 1050

MICROECONOMICS Oligopoly Overviewoligopoly modelsgame theorystrategic decisionsantitrust laws and oligopoly regulationIntroductionoligopoly market structure in which o natural or legal barriers prevent entry of new firmslegal oligopoly market in which a limited number of firms may compete even when the demand and costs leave room for a larger number of firms o small number of firms competeduopoly market in which only two firms compete two firms can meet the demand at the lowest possible price min ATCfirms are interdependent and therefore face temptation to cooperateinterdependence each firms profit depends on every firms actionscartel illegal group of firms acting together to limit output raise price and increase profit o often break downOligopoly Models A The Kinked Demand Curve Modeleach firm believes that o Pcompetitors will not follow o Pcompetitors will all followdemand curve has a kink at the current price and quantity o above kinkdemand is elastic as other firms prices are unchanged Two Traditional Oligopoly Models o below kinkdemand is inelastic because all firms prices changeMR curve is broken at the current quantity o changes in MC within the break in the MR curve do not change P or Q o if MC increases enough all firms P kink vanishes The beliefs that generategoes against firms belief that P will not cause others to follow the kinked demand curveprofit is not maximized as firm has based actions on wrong are not always correct and beliefs firms can figure out this factIf MC increases enough all firms raise their prices and the kink vanishes A firm that bases its actions on wrong beliefs doesnt maximize profit 2010 Pearson Education Canada
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