Time Allocation:
- No need to take all allotted time; choice remains with the student.
- Two and a half hours of accommodation for those with specific needs.
Location:
- All students to report to the designated classroom.
Cheat Sheet Policy:
- Allowed: One cheat sheet, front and back.
- Cheat sheet can be typed, handwritten, or a combination of both.
Calculator Use:
- Calculators are permitted.
- Sharing calculators is not allowed.
Additional Materials:
- Highlighters, colored pencils, and pens are allowed.
Office Hours Schedule:
- Last office hours: Tuesday before the exam.
- Study day: Thursday with no campus availability; email questions to the instructor.
Exam Content Overview
Cumulative Nature:
- The exam is not cumulative; it focuses on specific chapters.
- Coverage: Chapters 10, 11, 12, and 13 only.
Review Sheet:
- A review sheet is available online under exam three for study guide preparation.
Chapter 13: Oligopoly
Oligopoly Characteristics:
- Markets characterized by a few large firms that produce either differentiated or homogeneous products.
- Differentiated Oligopoly Example: Coca-Cola market, includes firms like Coke, Pepsi, and Dr. Pepper which share over 40% of the market share.
- Homogeneous Oligopoly Example: Steel industry, where the firms produce the same product with no need for advertising to reduce costs.
Price and Efficiency:
- Oligopolies are not efficient; they do not achieve productive or allocative efficiency.
- The price they set is above the minimum average total cost (ATC) and marginal cost (MC).
- Productive Efficiency: Occurs when price equals minimum ATC, Allocative Efficiency: Occurs when price equals marginal cost.
Imperfect Competition:
- Oligopolies have excess capacity, meaning they can produce more than the current production level.
- Pricing structures and strategic behaviors are essential for oligopolies, often involving game theory.
Game Theory in Oligopoly
Definition of Game Theory:
- The study of strategic decision-making among interdependent firms.
Characteristics:
- Oligopolistic firms are mutually dependent; they monitor competitor actions closely.
- Strategic behaviors involve decision-making based on competitors' potential actions.
Price Leadership:
- A situation where one firm changes its price, leading competitors to follow, without explicit collusion—considered legal.
- Example: Airline baggage fees where one airline’s fee change prompts others to adjust similarly.
Collusion:
- When firms agree on pricing or quantity, forming what is called a cartel (illegal in the U.S.).
- Example: OPEC, which coordinates the Oil market and stabilizes prices and supply.
Payoff Matrix
Understanding Profit Scenarios:
- Firms' decisions can be represented in payoff matrices, illustrating the profits possible under different competitive pricing strategies.
- Example Situation:
- If Firm A charges low while Firm B charges high, Firm A may gain a higher profit than Firm B due to attracting more customers.
- Conversely, if both charge low, profits converge at a lower margin for both firms.
Dominant Strategy:
- The strategy that yields the highest profit regardless of competitor actions.
- Illustrated through payoff matrix outcomes, showing incentive to price low versus high.
- If both firms pursue their dominant strategies, they may end up in a less optimal profit situation.
Summary of Concepts Discussed
Types of Oligopoly:
- Homogeneous: Same product (e.g., Aluminum).
- Differentiated: Slightly different products (e.g., Beer).
Characteristics of Oligopolies:
- Few large firms, barriers to entry, operational independence with competitive awareness.
Real-world Implications:
- Understanding market structures and strategic behaviors can lead to better business decisions, innovation, and market dynamics in oligopolies.
Strategy Adjustments:
- Firms must adapt strategies based on competitor behavior and market conditions to maintain or grow market share while optimizing profits.