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Chapter 14

ECON 1116 Chapter 14: Chapter 14- Oligopoly

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ECON 1116
Michael Stone

Chapter 14- Oligopoly Firms in Less Competitive Markets Oligopoly and Barriers to Entry • Oligopoly- a market structure in which a small number of interdependent firms compete • Many economists believe a 4 firm concentration ratio greater than 40% indicates oligopoly// False because: do not include goods and services imported, calculated for national market even though most competition is mainly local, do not account for competition that exists between firms in different industries • Barriers to Entry- anything that keeps new firms from entering an industry in which firms are earning economic profits 1. Economies of Scale- greater economies of scale, smaller number of firms that will be in the industry  oligopoly 2. Ownership of Resources- control of a specific input can be a barrier of entry 3. Government Imposed Barriers- lobbyists to persuade government for price ceilings/ price floors, or taxes (patents/ occupational licensing doctors and dentists) Game Theory and Oligopoly • Game Theory- study of how people make decisions in situations in which attaining their goals depends on their interactions with others, the study of the firms in industries where the profits of a firm depend on its interactions with other firms 3 Rules 1. Rules that determine what actions are allowed 2. Strategies that players employ to obtain objectives 3. Payoffs- that are the results of the interactions among the players • Business Strategy- actions that a firm takes to achieve goals such as maximizing profits Duopoly Game- 2 Firms (Apple vs Spotify) • Goal to undercut the other by offering a lower price • *Payoff matrix- a table that shows the payoffs of strategies by each firm earns from every combination of strategies by the firms • Could form a collusion (an agreement among firms to change the same price or otherwise not to
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