CAS EC 101 Lecture Notes - Lecture 10: Oligopoly, Strategic Dominance, Regional Policy Of The European Union
1 May 2018
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CHAPTER 15: OLIGOPOLY
Objective 1: Measuring Market Concentration
• Concentration Ratio – the percentage of the market’s total output supplied by its four
largest firms
o The higher the concentration ratio, the less competition
• Oligopoly – a market structure characterized by a few sellers who make up the majority
of the market (must be greater than 40%) and offer similar or identical products
o Important to note this is a market structure with high concentration ratios
• Concentration Ratios in Select U.S. Industries
o Department Stores = 97% (Target & Walmart)
o Breakfast Cereal = 80% (Kellogg’s and General Mills)
Objective 2: Four-Firm Concentration Ratios
• This is a way to look at the extent of competition in an industry
o Typically, a four-firm concentration rate above 40% indicates an oligopoly
• Limitations
o This is not inclusive of goods and services that foreign firms export to the U.S.
o They are calculated for national markets, even if markets are local
o The definition of a market is tricky (ex: Walmart and BJs are in different markets
but most consumers visit both which make them compete against each other to
some extent)
Objective 3: Game Theory (aka: prisoner’s dilemma game)
• Game Theory – the study of how firms/people within firms behave in strategic situations
o Components of a Game: players, strategies for each player, payoffs
• Symmetric Game – when two firms make mirror image payoffs of each other when
spending small/large amounts of advertising (and vice versa)
o An Oligopoly requires strategic behaviors
o Strategic Interdependence – an optimal decision for one firm is dependent on
another firm’s actions (and vice versa)
▪ Essentially, a firm’s decisions about P or Q can affect other firms and
cause them to react
• Example
o Players: Coke and Pepsi
o Strategies for Each Player: spend a little or a lot on advertising
o Payoffs: increase in consumption of each good
• Coke’s Dominant Strategy
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