Oligopoly

1

• Oligopoly

2
Imperfect Competition

• Imperfect Competition is competition between
  firms but not to the extent that each is a price
  taker.
  
• Oligopoly
• Only a few sellers, each offering a similar or
  identical product to the others.
  
• Monopolistic Competition
• Many firms selling products that are similar but
  different enough that each is monopoly in its own
  brand (Pepsi vs Coke)

3
Oligopoly

• The key to an oligopoly is how the firms behave
• Collusion together they act like a monopolist,
  raising prices and reducing output.
  
• Cartel group of firms that collude to raise
  prices and reduce output.

4
Duopoly
Demand
MC0
MR
5
Duopoly
Jack and Jill agree to produce 30 gallons each
and sell at 60/gallon. The profit for each is
1,800.
Demand
MC0
MR
6
Does Jack cheat on Jill?
If Jill produces 30 gallons then Jack faces the
following demand.
Output
MC0
MR
7
Does Jill cheat on Jack?
If Jack produces 30 gallons then Jill faces the
following demand.
Output
MC0
MR
8
Cartel faces a sticky end
Both Jack and Jill cheat by producing 40 gallons
each and the price falls to 40 and each earns a
profit of 1,600.
Demand
MC0
MR
9
Oligopoly
As the number of firms in an Oligopoly increases
the opportunity for tacit collusion decreases
and the price and quantity moves closer to that
of perfect competition
Demand
Oligopoly
MC0
MR
10
Game Theory

• Game Theory is the study of how people behave in
  strategic situations.

11
Prisoners Dilemma
12
Prisoners Dilemma
13
Prisoners Dilemma
14
Nash Equilibrium

• In repeated games the best strategy is
  mirroring Do whatever your opponent did in the
  last round.
  
• Nash Equilibrium is a stalemate each firm is
  doing the best it can given other firms
  behaviour. Each is waiting for the other to make
  the first move.

15
End of part two