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Chapter 14

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ECON 1116
Osborne Jackson

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 her actio
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