Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopoly
Chapter 16
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Imperfect Competition
Imperfect competition refers to
those market structures that fall
between perfect competition and
pure monopoly.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Imperfect Competition
Imperfect competition includes
industries in which firms have
competitors but do not face so
much competition that they are
price takers.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Imperfectly
Competitive Markets
?Oligopoly
?Only a few sellers,each offering a
similar or identical product to the
others.
?Monopolistic Competition
?Many firms selling products that are
similar but not identical.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Four Types of Market Structure
Monopoly Oligopoly Monopolistic
Competition
Perfect
Competition
? Tap water
? Cable TV
? Tennis balls
? Crude oil
? Novels
? Movies
? Wheat
? Milk
Number of Firms?
Type of Products?
Many
firms
One
firm Few
firms Differentiated
products
Identical
products
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Markets With Only a
Few Sellers
Because of the few sellers,the
key feature of oligopoly is the
tension between cooperation
and self-interest.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Characteristics of an Oligopoly
Market
?Few sellers offering similar or identical
products
?Interdependent firms
?Best off cooperating and acting like a
monopolist by producing a small quantity
of output and charging a price above
marginal cost
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example
A duopoly is an oligopoly with
only two members,It is the
simplest type of oligopoly.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Demand
Schedule for Water
Quant i t y Price Tot al Revenue
0 $120 $ 0
10 110 1,100
20 100 2,000
30 90 2,700
40 80 3,200
50 70 3,500
60 60 3,600
70 50 3,500
80 40 3,200
90 30 2,700
100 20 2,000
110 10 1,100
120 0 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Price and
Quantity Supplied
?The price of water in a perfectly competitive
market would be driven to where the marginal
cost is zero:
P = MC = $0
Q = 120 gallons
?The price and quantity in a monopoly market
would be where total profit is maximized:
P = $60
Q = 60 gallons
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Price and
Quantity Supplied
?The socially efficient quantity of water is
120 gallons,but a monopolist would
produce only 60 gallons of water.
?So what outcome then could be expected
from duopolists?
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Competition,Monopolies,and
Cartels
?The duopolists may agree on a
monopoly outcome.
?Collusion
?The two firms may agree on the
quantity to produce and the price to
charge.
?Cartel
?The two firms may join together and act
in unison.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Competition,Monopolies,and
Cartels
Although oligopolists would like to form
cartels and earn monopoly profits,often that
is not possible,Antitrust laws prohibit
explicit agreements among oligopolists as a
matter of public policy.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Equilibrium for an Oligopoly
A Nash equilibrium is a situation in
which economic actors interacting
with one another each choose their
best strategy given the strategies that
all the others have chosen.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Equilibrium for an Oligopoly
When firms in an oligopoly individually
choose production to maximize profit,they
produce quantity of output greater than the
level produced by monopoly and less than
the level produced by competition.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Equilibrium for an Oligopoly
The oligopoly price is less than the
monopoly price but greater than the
competitive price (which equals
marginal cost).
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary of Equilibrium for an
Oligopoly
?Possible outcome if oligopoly firms
pursue their own self-interests:
?Joint output is greater than the monopoly
quantity but less than the competitive
industry quantity.
?Market prices are lower than monopoly
price but greater than competitive price.
?Total profits are less than the monopoly
profit.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Demand
Schedule for Water
Quant i t y Price Tot al Revenue
0 $120 $ 0
10 110 1,100
20 100 2,000
30 90 2,700
40 80 3,200
50 70 3,500
60 60 3,600
70 50 3,500
80 40 3,200
90 30 2,700
100 20 2,000
110 10 1,100
120 0 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How the Size of an Oligopoly
Affects the Market Outcome
?How increasing the number of sellers
affects the price and quantity:
?The output effect,Because price is above
marginal cost,selling more at the going price
raises profits.
?The price effect,Raising production lowers
the price and the profit per unit on all units
sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How the Size of an Oligopoly
Affects the Market Outcome
?As the number of sellers in an oligopoly
grows larger,an oligopolistic market looks
more and more like a competitive market,
?The price approaches marginal cost,and
the quantity produced approaches the
socially efficient level.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Game Theory and the
Economics of Cooperation
?Game theory is the study of how people
behave in strategic situations.
?Strategic decisions are those in which
each person,in deciding what actions to
take,must consider how others might
respond to that action.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Game Theory and the
Economics of Cooperation
?Because the number of firms in an
oligopolistic market is small,each firm
must act strategically,
?Each firm knows that its profit depends
not only on how much it produced but
also on how much the other firms
produce.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
The prisoners’ dilemma provides
insight into the difficulty in
maintaining cooperation.
Often people (firms) fail to cooperate
with one another even when cooperation
would make them better off.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
Bonnie’s Decision
Confess Remain Silent
Confess
Remain
Silent
Clyde’s
Decision
Clyde gets
8 years
Bonnie gets
8 years
Bonnie gets
20 years
Bonnie gets
1 year
Bonnie goes
free
Clyde gets
20 years
Clyde gets
1 year
Clyde goes
free
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
The dominant strategy is the best
strategy for a player to follow
regardless of the strategies pursued
by other players.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
Cooperation is difficult to
maintain,because cooperation is
not in the best interest of the
individual player.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopolies as a
Prisoners’ Dilemma
Iraq’s Decision
High Production Low Production
High
Production
Low
Production
Iran’s
Decision
Iran gets
$40 billion
Iraq gets
$40 billion
Iraq gets
$30 billion
Iraq gets
$50 billion
Iraq gets
$60 billion
Iran gets
$30 billion
Iran gets
$50 billion
Iran gets
$60 billion
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopolies as a
Prisoners’ Dilemma
Self-interest makes it difficult for the
oligopoly to maintain a cooperative
outcome with low production,high
prices,and monopoly profits.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Arms-Race Game
Decision of the United States (U.S.)
Arm Disarm
Arm
Disarm
Decision
of the
Soviet
Union
(USSR)
USSR
at risk
U.S,at risk U.S,at risk and weak
U.S,safeU.S,safe and powerful
USSR at
risk and
weak
USSR
safe
USSR safe
and
powerful
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Advertising Game
Marlboro’s Decision
Advertise Don’t Advertise
Advertise
Don’t
Advertise
Camel’s
Decision
Camel gets
$3 billion
profit
Marlboro gets
$3 billion
profit
Marlboro
gets $2
billion profit
Marlboro gets
$4 billion
profit
Marlboro gets
$5 billion
profit
Camel gets
$2 billion
profit
Camel gets
$4 billion
profit
Camel gets
$5 billion
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Common-Resources Game
Exxon’s Decision
Drill Two Wells Drill One Well
Drill Two
Wells
Drill One
Well
Arco’s
Decision
Arco gets
$4 million
profit
Exxon gets
$4 million
profit
Exxon gets
$3 million
profit
Exxon gets $5
million profit
Exxon gets
$6 million
profit
Arco gets
$3 million
profit
Arco gets
$5 million
profit
Arco gets
$6 million
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Why People Sometimes
Cooperate
Firms that care about future profits
will cooperate in repeated games
rather than cheating in a single game
to achieve a one-time gain.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Jack and Jill’s Oligopoly Game
Jack’s Decision
Sell 40 gallons Sell 30 gallons
Sell 40
gallons
Sell 30
gallons
Jill’s
Decision
Jill gets
$1,600 profit
Jack gets
$1,600 profit
Jack gets
$1,500 profit
Jack gets
$1,800 profit
Jack gets
$2,000 profit
Jill gets
$1,500 profit
Jill gets
$1,800 profit
Jill gets
$2,000 profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Public Policy Toward
Oligopolies
Cooperation among oligopolists is
undesirable from the standpoint of
society as a whole because it leads to
production that is too low and prices
that are too high.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Restraint of Trade and the
Antitrust Laws
?Antitrust laws make it illegal to restrain
trade or attempt to monopolize a market.
? Sherman Antitrust Act of 1890
? Clayton Act of 1914
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Controversies over Antitrust
Policy
?Antitrust policies sometimes may not
allow business practices that have
potentially positive effects:
?Resale price maintenance
?Predatory pricing
?Tying
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Resale Price Maintenance
Resale price maintenance (or fair trade)
occurs when suppliers (like wholesalers)
require the retailers that they sell to,to
charge customers a specific amount.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Predatory Pricing
Predatory pricing occurs when a large
firm begins to cut the price of its
product(s) with the intent of driving its
competitor(s) out of the market.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Tying
Tying refers to when a firm offers
two (or more) of its products together
at a single price,rather than
separately.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Oligopolists maximize their total profits
by forming a cartel and acting like a
monopolist.
?If oligopolists make decisions about
production levels individually,the result
is a greater quantity and a lower price
than under the monopoly outcome.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?The prisoners’ dilemma shows that self-
interest can prevent people from
maintaining cooperation,even when
cooperation is in their mutual self-
interest,
?The logic of the prisoners’ dilemma
applies in many situations,including
oligopolies.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Policymakers use the antitrust laws
to prevent oligopolies from
engaging in behavior that reduces
competition.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Graphical
Review
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Four Types of Market Structure
Monopoly Oligopoly Monopolistic
Competition
Perfect
Competition
? Tap water
? Cable TV
? Tennis balls
? Crude oil
? Novels
? Movies
? Wheat
? Milk
Number of Firms?
Type of Products?
Many
firms
One
firm Few
firms Differentiated
products
Identical
products
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
Bonnie’s Decision
Confess Remain Silent
Confess
Remain
Silent
Clyde’s
Decision
Clyde gets
8 years
Bonnie gets
8 years
Bonnie gets
20 years
Bonnie gets
1 year
Bonnie goes
free
Clyde gets
20 years
Clyde gets
1 year
Clyde goes
free
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopolies as a
Prisoners’ Dilemma
Iraq’s Decision
High Production Low Production
High
Production
Low
Production
Iran’s
Decision
Iran gets
$40 billion
Iraq gets
$40 billion
Iraq gets
$30 billion
Iraq gets
$50 billion
Iraq gets
$60 billion
Iran gets
$30 billion
Iran gets
$50 billion
Iran gets
$60 billion
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Arms-Race Game
Decision of the United States (U.S.)
Arm Disarm
Arm
Disarm
Decision
of the
Soviet
Union
(USSR)
USSR
at risk
U.S,at risk U.S,at risk and weak
U.S,safeU.S,safe and powerful
USSR at
risk and
weak
USSR
safe
USSR safe
and
powerful
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Advertising Game
Marlboro’s Decision
Advertise Don’t Advertise
Advertise
Don’t
Advertise
Camel’s
Decision
Camel gets
$3 billion
profit
Marlboro gets
$3 billion
profit
Marlboro
gets $2
billion profit
Marlboro gets
$4 billion
profit
Marlboro gets
$5 billion
profit
Camel gets
$2 billion
profit
Camel gets
$4 billion
profit
Camel gets
$5 billion
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Common-Resources Game
Exxon’s Decision
Drill Two Wells Drill One Well
Drill Two
Wells
Drill One
Well
Arco’s
Decision
Arco gets
$4 million
profit
Exxon gets
$4 million
profit
Exxon gets
$3 million
profit
Exxon gets $5
million profit
Exxon gets
$6 million
profit
Arco gets
$3 million
profit
Arco gets
$5 million
profit
Arco gets
$6 million
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Jack and Jill’s Oligopoly Game
Jack’s Decision
Sell 40 gallons Sell 30 gallons
Sell 40
gallons
Sell 30
gallons
Jill’s
Decision
Jill gets
$1,600 profit
Jack gets
$1,600 profit
Jack gets
$1,500 profit
Jack gets
$1,800 profit
Jack gets
$2,000 profit
Jill gets
$1,500 profit
Jill gets
$1,800 profit
Jill gets
$2,000 profit
Oligopoly
Chapter 16
Copyright ? 2001 by Harcourt,Inc.
All rights reserved,Requests for permission to make copies of any part of the
work should be mailed to:
Permissions Department,Harcourt College Publishers,
6277 Sea Harbor Drive,Orlando,Florida 32887-6777.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Imperfect Competition
Imperfect competition refers to
those market structures that fall
between perfect competition and
pure monopoly.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Imperfect Competition
Imperfect competition includes
industries in which firms have
competitors but do not face so
much competition that they are
price takers.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Types of Imperfectly
Competitive Markets
?Oligopoly
?Only a few sellers,each offering a
similar or identical product to the
others.
?Monopolistic Competition
?Many firms selling products that are
similar but not identical.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Four Types of Market Structure
Monopoly Oligopoly Monopolistic
Competition
Perfect
Competition
? Tap water
? Cable TV
? Tennis balls
? Crude oil
? Novels
? Movies
? Wheat
? Milk
Number of Firms?
Type of Products?
Many
firms
One
firm Few
firms Differentiated
products
Identical
products
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Markets With Only a
Few Sellers
Because of the few sellers,the
key feature of oligopoly is the
tension between cooperation
and self-interest.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Characteristics of an Oligopoly
Market
?Few sellers offering similar or identical
products
?Interdependent firms
?Best off cooperating and acting like a
monopolist by producing a small quantity
of output and charging a price above
marginal cost
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example
A duopoly is an oligopoly with
only two members,It is the
simplest type of oligopoly.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Demand
Schedule for Water
Quant i t y Price Tot al Revenue
0 $120 $ 0
10 110 1,100
20 100 2,000
30 90 2,700
40 80 3,200
50 70 3,500
60 60 3,600
70 50 3,500
80 40 3,200
90 30 2,700
100 20 2,000
110 10 1,100
120 0 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Price and
Quantity Supplied
?The price of water in a perfectly competitive
market would be driven to where the marginal
cost is zero:
P = MC = $0
Q = 120 gallons
?The price and quantity in a monopoly market
would be where total profit is maximized:
P = $60
Q = 60 gallons
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Price and
Quantity Supplied
?The socially efficient quantity of water is
120 gallons,but a monopolist would
produce only 60 gallons of water.
?So what outcome then could be expected
from duopolists?
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Competition,Monopolies,and
Cartels
?The duopolists may agree on a
monopoly outcome.
?Collusion
?The two firms may agree on the
quantity to produce and the price to
charge.
?Cartel
?The two firms may join together and act
in unison.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Competition,Monopolies,and
Cartels
Although oligopolists would like to form
cartels and earn monopoly profits,often that
is not possible,Antitrust laws prohibit
explicit agreements among oligopolists as a
matter of public policy.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Equilibrium for an Oligopoly
A Nash equilibrium is a situation in
which economic actors interacting
with one another each choose their
best strategy given the strategies that
all the others have chosen.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Equilibrium for an Oligopoly
When firms in an oligopoly individually
choose production to maximize profit,they
produce quantity of output greater than the
level produced by monopoly and less than
the level produced by competition.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Equilibrium for an Oligopoly
The oligopoly price is less than the
monopoly price but greater than the
competitive price (which equals
marginal cost).
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary of Equilibrium for an
Oligopoly
?Possible outcome if oligopoly firms
pursue their own self-interests:
?Joint output is greater than the monopoly
quantity but less than the competitive
industry quantity.
?Market prices are lower than monopoly
price but greater than competitive price.
?Total profits are less than the monopoly
profit.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Duopoly Example,Demand
Schedule for Water
Quant i t y Price Tot al Revenue
0 $120 $ 0
10 110 1,100
20 100 2,000
30 90 2,700
40 80 3,200
50 70 3,500
60 60 3,600
70 50 3,500
80 40 3,200
90 30 2,700
100 20 2,000
110 10 1,100
120 0 0
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How the Size of an Oligopoly
Affects the Market Outcome
?How increasing the number of sellers
affects the price and quantity:
?The output effect,Because price is above
marginal cost,selling more at the going price
raises profits.
?The price effect,Raising production lowers
the price and the profit per unit on all units
sold.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
How the Size of an Oligopoly
Affects the Market Outcome
?As the number of sellers in an oligopoly
grows larger,an oligopolistic market looks
more and more like a competitive market,
?The price approaches marginal cost,and
the quantity produced approaches the
socially efficient level.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Game Theory and the
Economics of Cooperation
?Game theory is the study of how people
behave in strategic situations.
?Strategic decisions are those in which
each person,in deciding what actions to
take,must consider how others might
respond to that action.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Game Theory and the
Economics of Cooperation
?Because the number of firms in an
oligopolistic market is small,each firm
must act strategically,
?Each firm knows that its profit depends
not only on how much it produced but
also on how much the other firms
produce.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
The prisoners’ dilemma provides
insight into the difficulty in
maintaining cooperation.
Often people (firms) fail to cooperate
with one another even when cooperation
would make them better off.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
Bonnie’s Decision
Confess Remain Silent
Confess
Remain
Silent
Clyde’s
Decision
Clyde gets
8 years
Bonnie gets
8 years
Bonnie gets
20 years
Bonnie gets
1 year
Bonnie goes
free
Clyde gets
20 years
Clyde gets
1 year
Clyde goes
free
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
The dominant strategy is the best
strategy for a player to follow
regardless of the strategies pursued
by other players.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
Cooperation is difficult to
maintain,because cooperation is
not in the best interest of the
individual player.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopolies as a
Prisoners’ Dilemma
Iraq’s Decision
High Production Low Production
High
Production
Low
Production
Iran’s
Decision
Iran gets
$40 billion
Iraq gets
$40 billion
Iraq gets
$30 billion
Iraq gets
$50 billion
Iraq gets
$60 billion
Iran gets
$30 billion
Iran gets
$50 billion
Iran gets
$60 billion
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopolies as a
Prisoners’ Dilemma
Self-interest makes it difficult for the
oligopoly to maintain a cooperative
outcome with low production,high
prices,and monopoly profits.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Arms-Race Game
Decision of the United States (U.S.)
Arm Disarm
Arm
Disarm
Decision
of the
Soviet
Union
(USSR)
USSR
at risk
U.S,at risk U.S,at risk and weak
U.S,safeU.S,safe and powerful
USSR at
risk and
weak
USSR
safe
USSR safe
and
powerful
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Advertising Game
Marlboro’s Decision
Advertise Don’t Advertise
Advertise
Don’t
Advertise
Camel’s
Decision
Camel gets
$3 billion
profit
Marlboro gets
$3 billion
profit
Marlboro
gets $2
billion profit
Marlboro gets
$4 billion
profit
Marlboro gets
$5 billion
profit
Camel gets
$2 billion
profit
Camel gets
$4 billion
profit
Camel gets
$5 billion
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Common-Resources Game
Exxon’s Decision
Drill Two Wells Drill One Well
Drill Two
Wells
Drill One
Well
Arco’s
Decision
Arco gets
$4 million
profit
Exxon gets
$4 million
profit
Exxon gets
$3 million
profit
Exxon gets $5
million profit
Exxon gets
$6 million
profit
Arco gets
$3 million
profit
Arco gets
$5 million
profit
Arco gets
$6 million
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Why People Sometimes
Cooperate
Firms that care about future profits
will cooperate in repeated games
rather than cheating in a single game
to achieve a one-time gain.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Jack and Jill’s Oligopoly Game
Jack’s Decision
Sell 40 gallons Sell 30 gallons
Sell 40
gallons
Sell 30
gallons
Jill’s
Decision
Jill gets
$1,600 profit
Jack gets
$1,600 profit
Jack gets
$1,500 profit
Jack gets
$1,800 profit
Jack gets
$2,000 profit
Jill gets
$1,500 profit
Jill gets
$1,800 profit
Jill gets
$2,000 profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Public Policy Toward
Oligopolies
Cooperation among oligopolists is
undesirable from the standpoint of
society as a whole because it leads to
production that is too low and prices
that are too high.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Restraint of Trade and the
Antitrust Laws
?Antitrust laws make it illegal to restrain
trade or attempt to monopolize a market.
? Sherman Antitrust Act of 1890
? Clayton Act of 1914
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Controversies over Antitrust
Policy
?Antitrust policies sometimes may not
allow business practices that have
potentially positive effects:
?Resale price maintenance
?Predatory pricing
?Tying
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Resale Price Maintenance
Resale price maintenance (or fair trade)
occurs when suppliers (like wholesalers)
require the retailers that they sell to,to
charge customers a specific amount.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Predatory Pricing
Predatory pricing occurs when a large
firm begins to cut the price of its
product(s) with the intent of driving its
competitor(s) out of the market.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Tying
Tying refers to when a firm offers
two (or more) of its products together
at a single price,rather than
separately.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Oligopolists maximize their total profits
by forming a cartel and acting like a
monopolist.
?If oligopolists make decisions about
production levels individually,the result
is a greater quantity and a lower price
than under the monopoly outcome.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?The prisoners’ dilemma shows that self-
interest can prevent people from
maintaining cooperation,even when
cooperation is in their mutual self-
interest,
?The logic of the prisoners’ dilemma
applies in many situations,including
oligopolies.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Summary
?Policymakers use the antitrust laws
to prevent oligopolies from
engaging in behavior that reduces
competition.
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Graphical
Review
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Four Types of Market Structure
Monopoly Oligopoly Monopolistic
Competition
Perfect
Competition
? Tap water
? Cable TV
? Tennis balls
? Crude oil
? Novels
? Movies
? Wheat
? Milk
Number of Firms?
Type of Products?
Many
firms
One
firm Few
firms Differentiated
products
Identical
products
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
The Prisoners’ Dilemma
Bonnie’s Decision
Confess Remain Silent
Confess
Remain
Silent
Clyde’s
Decision
Clyde gets
8 years
Bonnie gets
8 years
Bonnie gets
20 years
Bonnie gets
1 year
Bonnie goes
free
Clyde gets
20 years
Clyde gets
1 year
Clyde goes
free
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Oligopolies as a
Prisoners’ Dilemma
Iraq’s Decision
High Production Low Production
High
Production
Low
Production
Iran’s
Decision
Iran gets
$40 billion
Iraq gets
$40 billion
Iraq gets
$30 billion
Iraq gets
$50 billion
Iraq gets
$60 billion
Iran gets
$30 billion
Iran gets
$50 billion
Iran gets
$60 billion
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Arms-Race Game
Decision of the United States (U.S.)
Arm Disarm
Arm
Disarm
Decision
of the
Soviet
Union
(USSR)
USSR
at risk
U.S,at risk U.S,at risk and weak
U.S,safeU.S,safe and powerful
USSR at
risk and
weak
USSR
safe
USSR safe
and
powerful
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
An Advertising Game
Marlboro’s Decision
Advertise Don’t Advertise
Advertise
Don’t
Advertise
Camel’s
Decision
Camel gets
$3 billion
profit
Marlboro gets
$3 billion
profit
Marlboro
gets $2
billion profit
Marlboro gets
$4 billion
profit
Marlboro gets
$5 billion
profit
Camel gets
$2 billion
profit
Camel gets
$4 billion
profit
Camel gets
$5 billion
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
A Common-Resources Game
Exxon’s Decision
Drill Two Wells Drill One Well
Drill Two
Wells
Drill One
Well
Arco’s
Decision
Arco gets
$4 million
profit
Exxon gets
$4 million
profit
Exxon gets
$3 million
profit
Exxon gets $5
million profit
Exxon gets
$6 million
profit
Arco gets
$3 million
profit
Arco gets
$5 million
profit
Arco gets
$6 million
profit
Harcourt,Inc,items and derived items copyright ? 2001 by Harcourt,Inc.
Jack and Jill’s Oligopoly Game
Jack’s Decision
Sell 40 gallons Sell 30 gallons
Sell 40
gallons
Sell 30
gallons
Jill’s
Decision
Jill gets
$1,600 profit
Jack gets
$1,600 profit
Jack gets
$1,500 profit
Jack gets
$1,800 profit
Jack gets
$2,000 profit
Jill gets
$1,500 profit
Jill gets
$1,800 profit
Jill gets
$2,000 profit
