Oligopoly
Chapter 16
Imperfect Competition
Imperfect competition refers to those
market structures that fall between perfect
competition and pure monopoly.
Imperfect competition includes industries
in which firms have competitors but do
not face so much competition that they are
price takers.
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.
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
Markets With Only
a Few Sellers
Because of the few sellers,the key feature
of oligopoly is the tension between
cooperation and self-interest.
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.
A Duopoly Example
A duopoly is an oligopoly with only two
members,It is the simplest type of
oligopoly,
A Duopoly Example,Demand
Schedule for Water
Quantit y Price Total R evenu e
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
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
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?
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.
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.
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.
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.
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.
A Duopoly Example,
Demand Schedule for Water
Quantit y Price Total R evenu e
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
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.
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.
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.
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.
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.
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
The Prisoners’ Dilemma
The dominant strategy is the best strategy
for a player to follow regardless of the
strategies pursued by other players.
Cooperation is difficult to maintain,
because cooperation is not in the best
interest of the individual player.
The 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
Oligopolies as a
Prisoners’ Dilemma
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.
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
An Arms-Race Game
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
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
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,
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
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.
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
Controversies over Antitrust Policy
Antitrust policies sometimes may not
allow business practices that have
potentially positive effects:
Resale price maintenance
Predatory pricing
Tying
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.
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.
Tying
Tying refers to when a firm offers two (or
more) of its products together at a single
price,rather than separately.
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.
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.
Policymakers use the antitrust laws to
prevent oligopolies from engaging in
behavior that reduces competition.
Exercise #16
Problems and applications
#2,#5,#9
经济学可以更有趣
世界各国政府都限制烟草公司做广告，这对烟草业有利还是不利？为什么？
为什么女性愿意忍受高跟鞋带来的不便？
1950年代，美国常春藤高校橄榄球协议。
如何有效对付防鲨网？
为什么家长会赞成穿校服？
为什么宿舍限制电器的使用可以是一个整体最优？
如果一夫多妻制对男人有利，为什么以男人为主的立法者要禁止它？
Chapter 16
Imperfect Competition
Imperfect competition refers to those
market structures that fall between perfect
competition and pure monopoly.
Imperfect competition includes industries
in which firms have competitors but do
not face so much competition that they are
price takers.
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.
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
Markets With Only
a Few Sellers
Because of the few sellers,the key feature
of oligopoly is the tension between
cooperation and self-interest.
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.
A Duopoly Example
A duopoly is an oligopoly with only two
members,It is the simplest type of
oligopoly,
A Duopoly Example,Demand
Schedule for Water
Quantit y Price Total R evenu e
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
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
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?
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.
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.
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.
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.
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.
A Duopoly Example,
Demand Schedule for Water
Quantit y Price Total R evenu e
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
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.
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.
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.
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.
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.
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
The Prisoners’ Dilemma
The dominant strategy is the best strategy
for a player to follow regardless of the
strategies pursued by other players.
Cooperation is difficult to maintain,
because cooperation is not in the best
interest of the individual player.
The 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
Oligopolies as a
Prisoners’ Dilemma
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.
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
An Arms-Race Game
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
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
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,
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
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.
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
Controversies over Antitrust Policy
Antitrust policies sometimes may not
allow business practices that have
potentially positive effects:
Resale price maintenance
Predatory pricing
Tying
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.
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.
Tying
Tying refers to when a firm offers two (or
more) of its products together at a single
price,rather than separately.
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.
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.
Policymakers use the antitrust laws to
prevent oligopolies from engaging in
behavior that reduces competition.
Exercise #16
Problems and applications
#2,#5,#9
经济学可以更有趣
世界各国政府都限制烟草公司做广告，这对烟草业有利还是不利？为什么？
为什么女性愿意忍受高跟鞋带来的不便？
1950年代，美国常春藤高校橄榄球协议。
如何有效对付防鲨网？
为什么家长会赞成穿校服？
为什么宿舍限制电器的使用可以是一个整体最优？
如果一夫多妻制对男人有利，为什么以男人为主的立法者要禁止它？
