U4 M64-66 Oligopolies Slides HM
Page 1: Introduction to Section 12
Do Now: Google form Unit 4 Part 2 Introduction
Page 2: Unit Overview
Unit 4 Module 64: Combining important concepts from Modules 64-66.
Page 3: Oligopoly Overview
Introduction to Module 64 Section focusing on Oligopoly.
Page 4: Understanding Oligopoly
Definition: An oligopoly is characterized by a market with only a few sellers.
No universal number defines "few".
Measuring market structure includes:
Concentration ratios
Herfindahl-Hirschman Index.
Characteristics of oligopoly include:
Interdependence: each firm's outcome (profit) depends on the actions of other firms.
Differentiated from monopolies (no competing firms) and competitive markets (many firms).
Interdependence complicates market analysis beyond simple MC and MR intersection.
Page 5: Module Goals
Students will be able to:
Explain why oligopolists may reduce combined profits.
Describe benefits of collusion in oligopolies.
Apply game theory concepts (prisoner’s dilemma, Nash equilibrium) to understand oligopoly dynamics.
Analyze causes and effects of price wars, product differentiation, price leadership, and non-price competition.
Page 6: Characteristics of Oligopoly
Features:
A few large producers (less than 10).
Can produce identical or differentiated products.
High barriers to entry, e.g., economies of scale, ownership of raw materials.
Price makers with strategic pricing.
Examples: OPEC, cereal companies, car producers.
Page 7: Barriers to Entry in Oligopolies
Entry barriers that maintain oligopoly structure:
Economies of Scale (e.g., car industry).
High startup costs.
Control over raw materials.
Page 8: Key Terms in Oligopoly
Interdependence: Firms’ outcomes depend on others’ actions.
Duopoly: An oligopoly with 2 firms.
Collusion: Firms cooperating to increase profits.
Cartel: A colluding firm group potentially restricting supply.
Page 9: Research Activity
Research task on real-life duopolies, cartels, and instances of collusion via provided Google Form.
Page 10: Discussion Prompt
Do Now: Define interdependence in economic terms. Discuss.
Page 11: Demand Schedule for Dictionary Apps
Example demand schedule for dictionary apps:
$12: 0 million apps; Total Revenue: $0 million.
$6: 6 million apps; Total Revenue: $36 million.
Breakdown of total revenue based on app prices and demand.
Page 12: Duopoly Decisions
Scenario: Two firms selling dictionary apps with zero marginal cost.
Strategy development revolves around higher pricing vs. selling larger quantities.
Page 13: Cartel Formation in Duopoly
Possible outcome: Forming a cartel to set prices and maximize joint profits (e.g., $6 for 6 million apps).
Implications of a 50/50 sales split between the two firms.
Page 14: Incentives in Price Setting
Tension exists in sustaining a cartel as firms may act selfishly and undercut each other to gain higher revenue.
Page 15: Consequences of Underpricing
Continuous undercutting can move prices towards marginal cost, threatening profitability.
Page 16: Quantity and Price Effects
Quantity Effect: Revenue from selling one more unit.
Price Effect: Revenue decrease due to lowering price across existing units.
Page 17: Example of Quantity and Price Effects
If price drops from $550 to $500:
Price Effect:
how much did my revenue decrease, on the first amount of goods that you were selling before you added the extra one (original revenue - new revenue without additional unit)
MR = Quantity Effect - Price Effect
Page 18: Determining Oligopoly Structure
Measurement criteria:
Concentration Ratios (number of firms).
Herfindahl-Hirschman Index (squared sums of market shares).
Page 19: Example of Concentration Ratio and HHI
Case of 10 firms; top 4 firms account for 70% share indicates greater oligopolistic behavior potential.
Page 20: Mod 64 Understanding Check
Prompt: Go to Google Form in Schoology for understanding check.
Page 21: Introduction to Game Theory
Definition: Game theory studies strategic decision-making in interdependent scenarios.
Page 22: Importance of Game Theory
Assists oligopolists in maximizing profit through strategic decision-making.
Page 23: Ice Cream Man Simulation
Example scenario illustrating strategic location decision-making among competing sellers.
Page 24: Firm Location Strategy
Firm A chooses location first; strategies influence results.
Page 25: Strategic Pricing in Oligopolies
Oligopolies analyze pricing decisions carefully to avoid losses, relying on game theory.
Page 26: The Prisoner’s Dilemma
Example illustrating decision-making in duopolies.
Page 27: Incentives to Confess in Prisoner’s Dilemma
Thelma’s perspective shows confessing yields better outcomes regardless of Louise's choice.
Page 28: Payoff Matrix in Prisoner's Dilemma
Matrix showing outcomes based on prisoners' choices illustrates decision dynamics.
Page 29: Analyzing Prisoner 1's Strategy
Evaluating best moves based on expected outcomes when facing decisions of Prisoner 2.
Page 30: Confirming Dominant Strategy
Dominant strategy frequently favors confessing to reduce expected penalties.
Page 31: Dominant Strategy Dynamics
Repeated analysis affirms dominance of confessing in outcomes for Prisoner's strategy.
Page 32: Video Reference on Dilemma and Theory
Resource: Video link provided for further insight on the Prisoner’s Dilemma.
Page 33: Game Theory Practice Example
Analysis of Firm 2’s decision-making in profit scenarios based on production strategies.
Page 34: Game Theory Payoff Matrix
Payoff matrix headers and outcomes summarized for analysis.
Page 35: Media Reference
Resource: Link to "The Dark Knight" for illustrative context on game theory concepts.
Page 36: Do Now Task in Schoology
Assignments related to Game Theory Payoff Matrix.
Page 37: Incentives in Decision-Making
Payoff matrix illustrating why firms may collude or cheat, impacting profit dynamics.
Page 38: Understanding Dominant Strategies
Explanation of dominant strategies in context of firms' decision-making.
Page 39: Nash Equilibrium Concept
Definition: Nash equilibrium occurs when players make optimal decisions yielding stable outcomes.
Page 40: Overview of Collusion
Explanation of collusion and tacit collusion, highlighting firm strategies for maximizing profits.
Page 41: Collusion Dynamics Example
Exploration of incentives leading to repeated decision-making behaviors amongst firms.
Page 42: Conditions for Collusion
Guidelines for identifying boxes where collusion occurs in different outcomes.
Page 43: Assessing Profit Outcomes in Decisions
Evaluation of non-maximum outcomes suggesting conditions for firms' agreement without collusion.
Page 44: Key Takeaways
Oligopolies must engage in strategic pricing.
Tendency to collude exists for profit maximization.
Collusion presents incentives to cheat.
Decisions are informed by dominant strategies.
Page 45: Strategy Matrix Development
Questions to consider strategies under collusion and determine Nash equilibrium.
Page 46: Setup of Pirate Game Scenario
Distribution scenario among rational pirates highlighting decision-making rules.
Page 47: Understanding Gmine and Bmine Strategies
Alignment of strategies based on dominant outcomes for each firm.
Page 48: City Wheels Example
Profit analysis based on competing strategies and potential government subsidies.
Page 49: Evaluation of FRQB Example
Breakdown of points achievable based on responses to the given economic situation.
Page 50: Introduction to Oligopoly in Practice
Overview of practical applications of oligopoly concepts.
Page 51: Types of Oligopoly
Identification of three types of oligopolies:
Price Leadership
Colluding Oligopoly
Non-Colluding Oligopoly.
Page 52: Price Leadership Explained
Mechanism of how firms coordinate prices to maximize profits.
Page 53: Example of Price Leadership
Case study: Influence of small town gas stations on pricing.
Page 54: Price Leadership Characteristics
Legal implications of collusion contrasted with initiatives of price leadership.
Page 55: Price Wars Dynamics
Description of the temporary breakdowns that can occur in price leadership.
Page 56: Colluding Oligopolies Overview
Defining cartels and their roles in increasing profits via cooperation.
Page 57: Cartel Dynamics
Mechanics of cartels: agreeing to set prices and output for higher profits.
Page 58: Tacit Collusion Description
Understanding informal collusion leading to coordinated pricing strategies.
Page 59: Final Note on Simple Readings
Reminder: Some slides are not relevant for AP exam preparation.
Page 60: Monopoly Behavior in Colluding Oligopolies
Visual representation of colluding firms acting as a monopoly.
Page 61: Non-Colluding Oligopolies
Features of oligopolies that do not engage in colluding practices.
Page 62: Response Strategies of Non-Colluding Firms
Responses to competitors' pricing that lead to varying demand elasticities.
Page 63: Marginal Revenue Dynamics
Analysis of how MR and pricing models adjust based on price changes in non-colluding firms.
Page 64: Pricing Strategies Illustrated
Exploring how price cuts and increases affect demand behavior in non-collusive contexts.
Page 65: Marginal Revenue Implications
Understanding the kinked demand curve, showcasing firm responses to competitor pricing.
Page 66: Market Structures Venn Diagram
Visual comparison of different market structures and their similarities/differences.
Page 67: Market Structures Overview
Summary of the features associated with Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly.
Page 68: Market Structure Associations
Identify market structures corresponding to key economic concepts.
Page 69: Comparison Summary of Market Structures
Final recap of the distinctions among outlined market structures.