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Lecture 19

ECO101H1 Lecture 19: Oligopoly and Monopolistic Competition

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ECO100 Lecture 18 : Oligopoly and Monopolistic Competition Review Real life example International Cartel: Potash (fertilizer) Cartel breaks down as Russian member chooses to expand output, lowering monopoly price Oligopolists who were previously competing form a cartel: Output will not be allocatively efficient True or F: If the government imposes a price ceiling at the price that would prevail under perfect competition, a monopolist will INCREASE its output (in spite of the lower price) to perfectly competitive level Oligopoly Competiton Policy (Canada vs. Elsewhere) Break up illegal cartels, punish firms (financial and legal penalties) Primary focus: illegal pricefixing arrangements In our world: Most oligopolists compete Oligopolists try to fix p form a cartelcollude to monopoly pricing), which is illegal, governments will try to punish Example: Sothebys and Christies auction houses Fine art auctions: Oligopoly (S and C are 95 of market) Earn revenues: buyers pay commision (20) to house, sellers pay commision (10) to house Art seller: force auction houses to compete C sells for 8, S may sell for 6 Get the best possible price Prior to 1995, S and C would compete by lowering sellers commissions In March 1995, both auction houses would no longer negotiate (10 firm commision) C and S formed cartel t ix prices and earn monopoly profits January 2000, US Justice Department broke cartel, imprisoned top officials (leaked copy of written cartel agreement leaked) Oligopolist If collude to form cartel, ind ay earn monopoly profits If one firm has MR>MC, may cheat cartel by increasing output
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