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CAS EC 101 (177)
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Chapter 17

Chapter 17 Oligopoly

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Boston University
CAS EC 101
Todd Idson

Chapter 17: Oligopoly Friday, December 6, 2013 11:10 AM Oligopoly: A market structure in which only a few sellers offer similar or identical products • Want to act like monopolies but self-interest drives to competition Game Theory: The study of how people behave in strategic situations I. Market with Only a Few Sellers • Tension between cooperation and self-interest • Collusion: Agreement among firms in a market quantities to produce or prices to change • Cartel: A group of firms acting in unison ○ Must agree on total level of production as well as by each member A. The Equilibrium for an Oligopoly • Difficult to agree on price and production level due to anti-trust laws • Nash Equilibrium: Sellers choose their best strategy given the strategies that all the other sellers have chosen • Self-interest drives sellers to produce more which decreases the price • Do not end up reaching monopoly outcome and maximum profit • Aware of the market, sellers do not produce up to the competitive point where price equals marginal cost • When oligopoly firms choose to produce to maximize their own profit, they produce more than the monopoly level but less than the competitive level B. How the Size of an Oligopoly Affects the Market Outcome • When a cartel is not formed, each seller must decide how much to produce marginally ○ The output effect: If price is above marginal cost, selling one more at the same price will raise profit ○ The price effect: Raising production will increase total amount sold, which would decrease the price a
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