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ECON 1B03 (303)
Chapter 17

Chapter 17

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Usman Hannan

CHAPTER 17: OLIGOPOLY - game theory: the study of how people behave in strategic situations Markets with Only a Few Sellers - key feature is the tension between cooperation and self-interest A Duopoly Example - duopoly: only 2 members (simplest type) Competition, Monopolies, and Cartels - collusion: an agreement between firms in a market about quantities to produce or prices to charge - cartel: a group of firms acting in unison - once in a cartel the market is served by a monopoly (socially inefficient production) - a cartel must agree on the total level of production and the amount produced by each member (each firm wants to produce the greater amount as it results in a greater profit) The Equilibrium for an Oligopoly - not always possible to form cartels as prohibited by law - if they decide how much to produce on their own the will end up with less profit than the monopoly - Nash equilibrium: a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen - maximize joint profit if they cooperate with one another - will stop short of reaching a competitive firm’s rule (end up in the middle of a monopoly’s production and a competitive market’s production) The Size of an Oligopoly Affects the Market Outcome - as the size of the producers increase, there is less likely the possibility they will form a cartel - firm must weigh 2 effects in their production decision: 1) the output effect – selling 1 more product at the going price will increase profit because the price is above MC 2) the price effect – raising production will increase the total amount sold which will lower the price per unit and lower the profit - if the output effect > the price effect the owner will increase production (and vise versa) - as the oligopoly grown in size the magnitude of the price effect falls - as the number of sellers grow, the market looks like a competitive market and the quantity produced approaches the socially effi
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