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Chapter 17

Chapter 17 EC120.docx

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Wilfrid Laurier University
Peter Sinclair

EC120 Chapter 17-Oligopoly Week 10 Introduction -If you were to go to a store to buy hockey skates, you would likely come out with either Nike-Bauer or Reebok-CCM -These two companies make almost all of the skates sold in Canada. Together these firms determine the quantity of skates produced and, given the market demand curve, the price at which skates are sold. -This is an example of an oligopoly -Oligopoly-a market structure in which only a few sellers offer similar or identical products -The actions of any one seller in the market can have a large impact on the profits of all the other sellers -Oligopolistic firms are interdependent in a way that competitive firms are not. -Game theory-the study of how people behave in strategic situations -Strategic thinking is important in decisions -Each firm in an oligopoly should consider how its decision might affect the production decisions of all the other firms Markets with Only a Few Sellers -The group of oligopolists is best off cooperated and acting like a monopolist – producing a small quantity of output and charging a price above marginal cost A Duopoly Examples -An oligopoly with only two members -It is the simplest type of oligopoly -Imagine a town in which only two residents own wells that produce water that is safe for drinking. Each Saturday, the two decide how many litres of water to pump, bring the water to town and sell it for whatever price the market will bear Competition, Monopolies, and Cartels -What outcome should we expect from our duopolists? -One possibility is that they will get together and agree on the quantity of water to produce and the price to charge for it. This is called a collusion -The group of firms working together is called a cartel -Once a cartel is formed, the market is in effect serves by a monopoly, and we can apply our analysis from chapter 15 -A cartel must agree not only on the total level of production but also on the amount produced by each member EC120 Chapter 17-Oligopoly Week 10 The Equilibrium for an Oligopoly -Oligopolists would like to form cartels and earn monopoly profits but that is not possible -The monopoly outcome is unlikely -If the duopolists individually pursue their own self interest when deciding how much to produce, they produce a total quantity greater than the monopoly quantity, charge a price lower than the monopoly price, and earn total profit less than the monopoly profit -They much reach a 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 -Oligopolists would be better off cooperating and reaching monopoly outcome. Yet because they pursue their own self-interest, they do not end up reaching the monopoly outcome and maximizing their joint profit -Each oligopolist is tempted to raise production and capture a larger share of the market. As each of them tries to do this, total production rises, and the price falls -When firms in an oligopoly individually choose production to maximize profit, they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost) How the Size of an Oligopoly Affects the Market Outcome -If two more producers join, and they form a cartel , they would once again try to maximize total profit by producing the monopoly quantity and charging the
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