oligopoly

Positive sum game

A game in which the sum of the two firms outcome is positive

Repeated game

A game that reoccurs more than once that optional strategy

Payoff matrix

A square where each cell shows the payoff of each combination of strategies

Credible threat

A threat that is believable by other firms

Empty threat

A threat that's not believed by threatened firm

Collusion Example

Apple Inc. and several major publishers were accused by the U.S. government of conspiring to fix prices of e-books and limit retail price competition, according to a lawsuit filed on Wednesday, April 11th.

Why do oligopoly happen?

Because of the few sellers, the actions of any one seller in the market can have a large impact on the profits of all the other sellers.

Simultaneous game

Because the firm choose their strategy at the same time

One-time game

Because the forms select their optimal strategies in a single time period without regard to possible interaction in good time leriod

Why should firms act strategically in an oilgopoly

Because the number of firms in an oligopolistic market is small, each firm must act strategically.

Cheating is

Both bad to the cheater and very costly to the form that gets cheated on

To maximize prices, oligopolies

Can Collude rather than establish prices competitively or independently

Independent oligopolies

Compete with the respect to price which reduces their profit

why is cooperation difficult to maintain

Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player

Mutual interdependence revisited

Each forms profit depend on its own pricing strategy and that is if it's Rivals

Negative sum game

Equals negative

is the study of how people behave in strategic situations

Game theory

Monopolistic competition

Many firms selling products that are similar but not identical.

Imperfect Competition

Market structures that fall between perfect competition and pure monopoly. Industries in which firms have competitors but do not face so much competition that they are price takers.

Independent action by oligopolies

May lead to mutually competitive low price strategy

Zero sum game

Net gain equal zero because the one firms game equals the others loss

Oligopoly

Only a few sellers, each offering a similar or identical product to the others.

Optimal outcome of a game is such that

Optimal outcome of a game is such that no player has incentive to change her action even after considering an opponent's choice.

Look at notes

Phone notes

Antitrust policies sometimes may not allow business practices that have potentially positive effects:

Resale price maintenance ä Tying

Examples of Antitrust laws

Sherman Antitrust Act of 1890 Clayton Act of 1914

Outcome from Duopoly Example

The duopolists may agree on a monopoly outcome. 1.Collusion 2.Cartel

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.

Are strong enforcer can help

To prevent cheating

True of False and support Often people (firms) fail to cooperate with one another even when cooperation would make them better off.

True, prisoners dilemma

Nash equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen. A Nash equilibrium is a set of strategies from which neither side wants to independently deviate.

Strategic decisions are those in which

each person (firm) in deciding what actions to take, must consider how others (firms) might respond to that action.

dominant strategy

is the best strategy for a player to follow regardless of the strategies pursued by other players.

Antitrust laws

make it illegal to restrain trade or attempt to monopolize a market.

when is a strategy considered dominant

strategy is dominant if, regardless of what any other players do, the strategy earns a player a larger payoff than any other.

As the number of sellers in an oligopoly grows larger

.......the market looks more and more like a competitive market. . . . the price approaches marginal cost. . . . the quantity produced approaches the socially efficient level.

Why People Sometimes Cooperate

1. Firms in oligopolies have a strong incentive to collude in order to reduce production, raise prices, and increase profits. 2.Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain.

Oligopoly models

1. Kinked-demand curve 2.collusion pricing 3. Price leadership

Types of Imperfectly Competitive Markets

1. oligopoly 2. Monopolistic competition

Obstacles to Collusion

1.Cheating 2.Demand and Cost Differences 3.Number of Firms 4.Profit Incentive/Entry/Exit 5.Recessions 6.Legal Obstacles

Characteristics of an Oligopoly Market

1.Few sellers offering similar or identical products 2.Interdependent firms 3.In the long run, best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost

why is Cooperation among oligopolists undesirable

1.It leads to production that is too low. 2.It leads to prices that are too high.

Possible outcome if oligopoly firms pursue their own self-interests:

1.Joint output is greater than the monopoly quantity but less than the competitive industry quantity. 2.Market prices are lower than monopoly price but greater than competitive price. 3.Total profits are less than the monopoly profit.

Duopoly

A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.