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Oligopoly
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BETWEEN MONOPOLY ANDPERFECT COMPETITION
Imperfect competition refers to those market
structures that fall between perfect competition
and pure monopoly.
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BETWEEN MONOPOLY ANDPERFECT COMPETITION
Imperfect competition includes industries in
which firms have competitors but do not face
so much competition that they are price takers.
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BETWEEN MONOPOLY ANDPERFECT COMPETITION
Types of Imperfectly Competitive Markets
Oligopoly
Only afew sellers, each offering a similar or identical
product to the others. Monopolistic Competition
Many firms selling products that are similar but not
identical.
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Figure 1 The Four Types of Market Structure
Copyright 2004 South-Western
Tap water
Cable TV
Monopoly
Novels
Movies
Monopolistic
Competition
Tennis balls
Crude oil
Oligopoly
Number of Firms?
Perfect
Wheat
Milk
Competition
Type of Products?
Identical
products
Differentiated
products
One
firm
Few
firms
Many
firms
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MARKETS WITH ONLY A FEWSELLERS
Because of the few sellers, the key feature of
oligopoly is the tension between cooperation
and self-interest.
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MARKETS WITH ONLY A FEWSELLERS
Characteristics of an Oligopoly Market
Few sellers offering similar or identical products
Interdependent firms
Best off cooperating and acting like a monopolist
by producing a small quantity of output and
charging a price above marginal cost
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A Duopoly Example
A duopoly is an oligopoly with only two
members. It is the simplest type of oligopoly.
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Competition, Monopolies, and Cartels
The duopolists may agree on a monopoly
outcome.
Collusion
An agreement among firms in a market about quantitiesto produce or prices to charge.
Cartel
A group of firms acting in unison.
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The Equilibrium for an Oligopoly
ANash equilibrium is a situation in which
economic actors interacting with one another
each choose their best strategy given the
strategies that all the others have chosen.
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The Equilibrium for an Oligopoly
When firms in an oligopoly individually choose
production to maximize profit, they produce
quantity of output greater than the level
produced by monopoly and less than the levelproduced by competition.
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The Equilibrium for an Oligopoly
The oligopoly price is less than the monopoly
price but greater than the competitive price
(which equals marginal cost).
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Equilibrium for an Oligopoly
Summary
Possible outcome if oligopoly firms pursue their
own self-interests:
Joint output is greater than the monopoly quantity but lessthan the competitive industry quantity.
Market prices are lower than monopoly price but greater
than competitive price.
Total profits are less than the monopoly profit.
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How the Size of an Oligopoly Affects theMarket Outcome
How increasing the number of sellers affects
the price and quantity:
The output effect: Because price is above marginal
cost, selling more at the going price raises profits. The price effect: Raising production will increase
the amount sold, which will lower the price and the
profit per unit on all units sold.
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How the Size of an Oligopoly Affects theMarket Outcome
As the number of sellers in an oligopoly grows
larger, an oligopolistic market looks more and
more like a competitive market.
The price approaches marginal cost, and thequantity produced approaches the socially
efficient level.
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The Kinked Demand Curve
The Kinked Demand Curve
D2
D1
MR2
MR1
Price
Quantity0 Q
P
ab
c
d
MC0
MC1
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The Kinked Demand Curve
AR1
MR1
AR2
MR2
Rival firms assumed to follow a price cut(making demand relatively inelastic)
but
firms are assumed not follow a priceincrease (making demand relativelyelastic)
Assumes the main aim ofthe firm is to maintainmarket share
Price
Output
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Assume we start out at P1 and Q1:
Will a firm benefit from raising price above P1?
Will it benefit from cutting price below P1?
Deriving the Kinked Demand Curve
Raising price above P1
Demand is relatively elastic
Firm loses market share
and some total revenue
Price
Output
P1
Q1
AR1
MR1
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Assume we start out at P1 and Q1:
Will a firm benefit from raising price above P1?
Will it benefit from cutting price below P1?
Deriving the Kinked Demand Curve
Raising price above P1
Demand is relatively elastic
Firm loses market share
and some total revenue
Reducing price below P1
Demand is relatively inelastic
Little gain in market share
other firms have followed suit
Total revenue may still fall
Price
Output
P1
Q1
AR1
MR1
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AR
MR
MC
Profit Maximisation?
If MC curve for the first cuts through the
discontinuity in the MR curve does this
mean that the firm is maximizing profits?
Price
Output
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PUBLIC POLICY TOWARDOLIGOPOLIES
Cooperation among oligopolists is undesirablefrom the standpoint of society as a whole
because it leads toproduction that is too low
andprices that are too high.