Chapter 16: Oligopoly

Oligopoly

A market structure in which only a few sellers offer similar or identical products.

Monopolistic competition

A market structure in which many firms sell similar products but not identical.

A distinguishing feature of an oligopolistic industry is the tension between

cooperation and self-interest; because the oligopolists care about each of their own profits, there's an incentive to act on their own, limiting ability of the group to act as a monopoly.

Duopoly

An oligopoly consisting of only two firms.

Collusion

An agreement among firms in a market about quantities to produce or prices to charge.

Cartel

A group of firms acting in unison.

Why is it difficult for oligopolies to form cartels?

Antitrust laws prohibit agreements among firms and squabbling among cartel members over their shares is also likely to occur.

In the absence of a binding agreement,

the monopoly outcome is unlikely.

Nash Equilibrium

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

If oligopolists cooperated,

they would earn a higher total profit but pursue their own self-interest and earn a lower level of profit.

Output effect

Because P > MC, increasing output increases profit

Price effect

Because increasing output will raise the total quantity sold, the price will fall and will therefore lower profit.

The larger the number of sellers,

the less each seller is concerned about their own impact on the market price.

As the number of sellers in an oligopoly increases,

the oligopolistic market looks more competitive.

Game theory

The study of how people behave in strategic situations, meaning each person decides what actions what to take and must consider how others might respond.

Prisoners' dilemma

A particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

Dominant strategy

A strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Noncooperative equilibrium

An equilibrium in a game in which players do not cooperate but pursue their self-interest.