• The 2 extreme market structures:
1. Perfect competition: many firms, identical products
2. Monopoly: one firm
• In between these extremes: imperfect competition
1. Oligopoly: only a few large sellers offer similar/identical products (airline industry)
▪ Difficult entry
▪ Mutual interdependence
▪ Each firm chooses its P and Q
▪ A firm’s decision will affect other firms which will cause them to react
2. Monopolistic competition: many firms sell similar but NOT IDENTICAL products
▪ Free entry
# of sellers
Long run economic profits
The products firms sell
Firm has market power?
D-curve facing firm
• Duopoly= an oligopoly with 2 firms
o Ex: AT&T and Horizon
• Collusion= an agreement among firms in a market about quantities to produce or prices to
o Ex: AT&T and Verizon could agree to each produce half of the monopoly output.
• Cartel= a group of firms acting in unison
o Ex: AT&T and Verizon in the outcome with collusion.
• Collusion versus Self Interest
o Both firms would be better off if they both stick to the cartel agreement
o But each firm has incentive to renege on the agreement
o Lesson: It is difficult for oligopoly firms to form cartels and honor their agreements.
• Concentration ratio= the percentage of the market’s total output supplied by its four largest
o The higher the concentration ratio, the less competition.