Oligopoly

1
Oligopoly

• ECO 230
• J.F. OConnor

2
Market Structures

• Perfect competition
• Many firms and identical goods
• Monopolistic competition
• Many firms and differentiated goods
• Oligopoly
• Few firms and similar goods
• Monopoly
• One firm

3
Duopoly

• Two sellers
• Example of water well
• Can show the alternatives with this example
• See Table 16

4
Monopoly Cartel
5
Cournot or Nash Equilibrium
6
Comparison

• Monopoly or joint profit maximizing cartel
• 60 units and TR3,600
• Cournot-Nash Equilibrium
• 80 units, price 40, TE 3,200
• Jack 40 units and TR1,600
• Jill same as Jack
• Socially Optimal Equilibrium
• 120 units, priceMC 0

7
Impact of Competition

• Suppose a third person enters the water market
• Cournot-Nash equilibrium is now
• 90 units, price 30, TR2,700
• Jack 30 units and TR900
• What about a fourth person entering?
• Conclusion competition drives down price!

8
Compete or Cooperate

• This is the big issue for the oligopolist
• Cooperation (collusion) will always maximize
  joint profits
• Why not cooperate?
• Illegal in the U.S. (Sherman Act)
• Cartels tend to be difficult to organize and
  operate successfully (Why?)

9
Prisoners Dilemma

• Game theory studies behavior in case where
  strategy is important. How one participant does
  depends heavily on the actions of other
  individual participants.
• Prisoners dilemma is an example that
  demonstrates the fact that if each person looks
  after his individual interest, the result can be
  that both participants are worse off.

10
BonnieClydes Dilemma
Bonnie confesses Bonnie stay silent
Clyde confesses 8 years for Bonnie 8 years for Clyde 20 years for Bonnie 0 years for Clyde
Clyde stays silent 0 years for Bonnie 20 years for Clyde 1 year for Bonnie 1 year for Clyde
11

• Bonnie looks at her situation as follows
• Suppose Clyde confesses
• If I dont confess, I get 20 years
• If I confess, I get 8 years
• Suppose Clyde stays silent
• If I dont confess, I get 1 years
• If I confess, I get 0 years
• Better option in both cases is to confess!
• Confessing is a dominant strategy for Bonnie
• Same is true for Clyde

12
MarlboroCamels Dilemma
Marlboro advertises Marlboro doesnt advertise
Camel advertises Marlboro 3 bil. Camel 3 bil. Marlboro 2 bil. Camel 5 bil.
Camel does not advertise Marlboro 5 bil. Camel 2 bil. Marlboro 4 bil. Camel 4 bil.
13

• Camel looks at its situation as follows
• Suppose Malboro advertises
• If we dont, profit will be 2 bil.
• If we do, profit will be 3 bil.
• Suppose Marlboro does not advertise
• If we dont, profit will be 4 bil.
• If we do, profit will be 5 bil.
• Better option in both cases is to advertise!
• Advertising is a dominant strategy for Camel
• Also true for Marlboro, mutatis mutandis

14
Cartels

• OPEC
• Colombian Drug Cartel
• Mafia or Crime Syndicate
• Ivy League Schools
• Government enforced cartels market intervention
  to raise prices!

15

• Raise profits of participants by raising price
  away from competitive and toward monopoly levels
• Unstable because of internal conflict between
  individual and group interest
• Cheating is usually very profitable
• A viable cartel needs an effective enforcement
  mechanism or enforcer