Oligopoly: A market with a small group of firms and substantial barriers to entry. Examples include Nintendo, Microsoft, and Sony.
Cartel: A group of firms that explicitly agree to coordinate their activities (e.g., OPEC).
Monopolistic competition: Firms have market power, but no additional firm can enter and earn positive profits (e.g., restaurants).
Market Structures
Markets differ based on:
Number of firms.
Ease of entry and exit.
Ability to differentiate products.
Comparison of Market Structures
Monopoly:
Number of firms: 1
Entry conditions: No entry
Long-run profit: ≥0
Ability to set price: Price setter
Price level: Very high
Strategy dependent on individual rival firms’ behaviour: No (has no rivals)
Products: Single product
Example: Local natural gas utility
Oligopoly:
Number of firms: Few
Entry conditions: Limited entry
Long-run profit: ≥0
Ability to set price: Price setter
Strategy dependent on individual rival firms’ behaviour: Yes
Products: May be differentiated
Example: Automobile manufacturers
Monopolistic Competition:
Number of firms: Few or many
Entry conditions: Free entry
Long-run profit: 0
Ability to set price: Price setter
Price level: High
Strategy dependent on individual rival firms’ behaviour: Yes
Products: May be differentiated
Example: Books, restaurants
Perfect Competition:
Number of firms: Many
Entry conditions: Free entry
Long-run profit: 0
Ability to set price: Price taker
Price level: Low
Strategy dependent on individual rival firms’ behaviour: No (cares about market price only)
Products: Undifferentiated
Example: Apple farmers
Cartels
Oligopolistic firms have an incentive to form cartels to collude on prices or quantities to increase profits.
Examples include: OPEC and Canadian Federation of Quebec Maple Syrup Producers.
Cartels form if members believe coordination will increase profits.
Competition vs. Cartel
The diagrams illustrate the differences in price and quantity outcomes between competitive and cartelized markets, showing how cartels restrict output to raise prices.
Why Cartels Fail
Cartels fail if noncartel members can supply consumers with large quantities of goods.
Each member has an incentive to cheat on the cartel agreement.
Laws Against Cartels
Sherman Antitrust Act (1890) and Federal Trade Commission Act (1914) prohibit firms from explicitly agreeing to reduce competition.
Cartels persist because:
International cartels and cartels in some countries operate legally.
Some illegal cartels believe they can avoid detection or penalties are insignificant.
Some firms coordinate activity without explicit collusion.
Maintaining Cartels
Cartels must be able to:
Detect cheating and punish violators.
Keep illegal behavior hidden from customers and government agencies.
Wage Cartel Example
Google, Apple, Intel, and Adobe settled an anti-poaching class action, resolving claims they agreed not to hire each other’s employees, violating U.S. antitrust laws.
Cournot Oligopoly
Duopoly: An oligopoly with two firms.
Models:
Cournot: Firms simultaneously choose quantities without colluding.
Stackelberg: A leader firm chooses its quantity, and followers independently choose theirs.
Bertrand: Firms simultaneously and independently choose prices.
Cournot Model Assumptions
Firms are identical with the same cost functions and produce undifferentiated products.
Duopoly (two firms) example.
The market lasts for only one period; firms choose quantity or price once.
Nash Equilibrium
A set of actions is a Nash equilibrium if no firm can obtain a higher profit by choosing a different action, holding other firms' actions constant.
Duopoly Nash-Cournot Equilibrium
Cournot equilibrium: Quantities sold by firms such that no firm can obtain a higher profit by choosing a different quantity, holding other firms' quantities constant.
Airlines Market Example
Market demand: Q = 339 - p (p = price, Q = total quantity).
Each airline has a constant marginal cost (MC) and average cost (AC) of $147 per passenger.
Residual demand American faces:p = 339 - qA - qU
Marginal revenue function: MRA = 339 - 2qA - q_U
American Airlines’ best response: 339 - 2qA - qU = 147 \Rightarrow qA = 96 - \frac{1}{2}qU
As n grows large, the residual demand elasticity approaches negative infinity, and p = MC, which is the profit-maximizing condition of a price-taking competitive firm.