Principles of economics 2nd by mankiw chapter 16

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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 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 Number of Firms? Many firms One firm Monopoly Few firms Type of Products? Differentiated products Oligopoly • Tap water • Tennis balls • Cable • Crude oil Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Identic al product s Monopolisti c Competitio n Perfect Competitio n • Novels • Wheat • Movies • Milk 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 Quantity 10 20 30 40 50 60 70 80 90 100 110 120 Price $120 110 100 90 80 70 60 50 40 30 20 10 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Total Revenue $ 1,100 2,000 2,700 3,200 3,500 3,600 3,500 3,200 2,700 2,000 1,100 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 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 selfinterest can prevent people from maintaining cooperation, even when cooperation is in their mutual selfinterest ◆ 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 Number of Firms? Many firms One firm Monopoly Few firms Type of Products? Differentiated products Oligopoly • Tap water • Tennis balls • Cable • Crude oil Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Identic al product s Monopolisti c Competitio n Perfect Competitio n • Novels • Wheat • Movies • Milk The Prisoners’ Dilemma Bonnie’s Decision Confess Bonnie gets years Confess Clyde Clyde’s Decision Remain Silent Remain Silent Bonnie gets 20 years Clyde goes free gets years Bonnie goes free Clyde gets 20 years Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Bonnie gets year Clyde gets year Oligopolies as a Prisoners’ Dilemma Iraq’s Decision High Production High Production Iran gets Iran’s Decision Low Productio n Iraq gets $40 billion $40 billion Iraq gets $60 billion Iran gets $30 billion Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Low Production Iraq gets $30 billion Iran gets $60 billion Iraq gets $50 billion Iran gets $50 billion An Arms-Race Game Decision of the United States (U.S.) Arm Decision of the Soviet Union (USSR) Arm Disarm U.S at risk USSR at risk U.S safe and powerful USSR at risk and weak Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Disarm U.S at risk and weak USSR safe and powerful U.S safe USSR safe An Advertising Game Marlboro’s Decision Advertise Advertise Camel’s Decision Camel gets $3 billion profit Marlboro gets $3 billion profit Marlboro gets $5 billion profit Don’t Camel Advertise gets $2 billion profit Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Don’t Advertise Marlboro Camel gets $5 billion profit gets $2 billion profit Marlboro gets $4 Camel billion profit gets $4 billion profit A Common-Resources Game Exxon’s Decision Drill Two Wells Exxon gets $4 million Drill Two profit Wells Arco gets Arco’s Decision Drill One Well $4 million profit Exxon gets $6 million profit Arco gets $3 million profit Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Drill One Well Exxon gets $3 million profit Arco gets $6 million profit Exxon gets $5 million profit Arco gets $5 million profit Jack and Jill’s Oligopoly Game Jack’s Decision Sell 40 gallons Jack gets Sell 40 gallons Jill’s Decision Sell 30 gallons Jack gets $1,500 profit $1,600 profit Jill gets $1,600 profit Sell 30 gallons Jill gets Jill gets $2,000 profit Jack gets $2,000 profit $1,500 profit Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Jack gets $1,800 profit Jill gets $1,800 profit ... 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... billion profit gets $2 billion profit Marlboro gets $4 Camel billion profit gets $4 billion profit A Common-Resources Game Exxon’s Decision Drill Two Wells Exxon gets $4 million Drill Two profit Wells... million profit Exxon gets $6 million profit Arco gets $3 million profit Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Drill One Well Exxon gets $3 million profit Arco
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