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01:220:102 (14)
Chapter 15

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Department
Economics
Course
01:220:102
Professor
Thomas Prusa
Semester
Fall

Description
Chapter 15 – Oligopoly The Prevalence of Oligopoly  Oligopoly- industry with only a small number of producers  Oligopolist- produce in such an industry  When no one firm has a monopoly, but producers nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition  Oligopolies arise from the same forces that lead to monopoly, except in weaker form Understanding Oligopoly A Duopoly Example  Duopoly- oligopoly consisting of only two firms  Duopolist- each firm  Sellers engage in collusion when they cooperate to raise their joint profits  By acting as if they were a single monopolist, oligopolists can maximize their combined profits  Cartel- agreement among several producers to obey output restrictions in order to increase their joint profits Collusion and Competition  Producing an additional unit of a good has two effects o Positive quantity effect- one more unit is sold, increasing total revenue by the price at which that unit is sold o Negative price effect- in order to sell one more unit, the monopolist must cut the market price on all units sold  When firms ignore the effects of their actions on each others’ profits, they engage in non-cooperative behavior Competing in Prices vs. Competing in Quantities  Each firm has an incentive to cheat-to produce more than it is supposed to under the cartel agreement  Likely to be easier to achieve informal collusion when firms in an industry face capacity constraints Games Oligopolists Play  When a firm’s decision significantly affects the profits of other firms in the industry, the firms are in a situation of interdependence  Game theory- the study of behavior in situations of interdependence The Prisoners’ Dilemma  Payoff- reward received by a player in a game, such as the profit earned by an oligopolist  Payoff matrix shows how the payoff to each of the participants in a two-payer game depends on the actions of both  Such a matrix helps us analyze situations of interdependence  Prisoners’ dilemma- game based on two premises o Each player has an incentive, regardless of what the other play does, to cheat- to take an action that benefits it at the other’s expense o When both players cheat, both are worse off than they would have been if neither had cheated  Dominant strategy- when it is a player’s best action regardless of the action taken by the other paly  Nash equilibrium (non-cooperative equilibrium)- result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players, ignoring the effects of his or her action on the payoffs received by those other players  Strategic behavior- when
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