Oligopoly: An industry with only a small number of producers.
Imperfect competition: When no one firm has a monopoly, but producers nonetheless realize
that they can affect market prices. (Firms compete but also possess market power).
- Two important forms of imperfect competition: oligopoly and monopolistic competition.
- Most important source of oligopoly is the existence of increasing returns to scale, which
give bigger producers a cost advantage over a smaller one.
o When effects are strong, they lead to monopoly.
Duopoly: an oligopoly consisting only of two firms.
- In a perfectly competitive industry, each firm would have the incentive to produce more
as long as the market price was above marginal cost.
o If both firms produce a lot, it will drive down the market price, so they and their
rivals must limit their production.
- So how much will they produce?
o Collusion: two companies engage in collusion when they cooperate to raise
their joint profits.
Cartel: is an agreement among several producers to obey output
restrictions in order to increase their joint profits.
Theory of monopoly: profit maximizing monopolist set marginal cost equal to marginal revenue.
(Producing additional unit of good has two effects):
1. Positive quantity effect: one more unit is sold, increasing total revenue by the price at
which that unit is sold.
2. Negative price effect: in order to sell one more unit, the monopolist must cut the market
price on all units sold.
a. Why the marginal revenue for monopolist is less than market price.
- Individual firm in an oligopolistic industry faces a smaller price effect from an additional
unit of output than does a monopolist. Games Oligopolists play: Game Theory:
- Interdependence: where each firm’s decision significantly affects the profit of the other
firm (or firms).
- Payoff: any situation in which the reward to anyone player depends on not only his or