OLIGOPOLY

GROUP 2
Objectives
See what market structure lie between monopoly and
1 competition

Examine what outcomes are possible when a market is an

2 Oligopoly

Learn about the prisoners’ dilemma and how it applies to

3 oligopoly and other issues

Consider how the antitrust laws try to foster competition in

4 oligopolistic market
OLIGOPOLY
Definition and Characteristic
01 Definition
• A market structure with a small number of firms offering
similar goods and services
• Competition is limited, allowing every firm to operate
successfully
• Breed regular partnership between firms and fosters a spirit
of cooperation
• A monopoly is one firm, Duopoly is two firms, Oligopoly is two
or more firms
• No precise upper limit to the number of firms in an oligopoly
02 Main Features
• Industry which is dominated by few firms

• Interdependence of firms

• Barriers to entry

• Differentiated products

• Most common market structure

03 Common Industries Overshadowed
• Cable Television Services
• Entertainment (Music and Film)
• Airlines
• Mass Media
• Pharmaceuticals
• Computers & Software
• Cellular Phone Services
• Smart Phone and Computer Operating Systems
• Aluminum and Steel
• Oil and Gas
• Automobiles
Competition, Monopolies & Cartels
02 Duopoly

• An oligopoly with only TWO members

• The Simplest type of oligopoly
• Faces the same problem with oligopolies with three
or more members
 CARTEL
A group of firms
acting in unison to
protect their interest

COLLUSION
An agreement among firms in a
market about quantities to
produce or prices to charge
EFFECTS OF CARTELS to Consumers

Price Fixing Lack of Transparency

An agreement between Members may agree to hide prices or withhold information,
competitive firms on the prices such as the hidden charges in credit card transactions
for goods.
Increasing/decreasing prices to Carving up market
gain advantage
Cartel Members may collectively break up a market into
regions/territory and not compete in each other’s territory
Price Leadership Restricted Output
Also known as Parallel pricing
When leading firm publishes their
prices before other firms which Members may agree to limit output onto the market
forces other firms to match the
price High Prices
Cartel members can all raise prices together – reduces
elasticity of Demand for any single member
Equilibrium for an Oligopoly
THE JACK & JILL STORY
 NASH EQUILIBRIUM
A situation in which economic actors in interacting with one another
each choose their best strategy given the strategies that all the
other actors have chosen
#Explanation
Oligopolist would be better off cooperating and reaching the
monopoly outcome

Because of pursuing their own self-interest, they do not end up

reaching the monopoly outcome and maximizing their joint profit

Each oligopolist is tempted to raise production and capture a larger

share of the market.
At the same time, self-interest does not drive the market all the way
to the competitive outcome

Oligopolist are aware that increases in the amount hey produce

reduce the price of their product

Therefore, they stop short of following the competitive firm’s rule of

producing up to the point where price equals marginal cost
#Conclusion
When firms in an oligopoly choose
production to maximize profit, the The oligopoly price is less than the
produce a quantity of output greater monopoly price but greater than the
then the level produced by monopoly competitive market
and less than the level produced by
competition
Effects Of The Size Of An Oligopoly
To the Market Outcome

Output Price
01 Effect 02 Effect 03 04

Price is above Raisin production If the price

will increase total
If the output is
marginal cost, effect is larger
amount sold and larger than the
selling 1 more than the output
which lower the price effect, the
gallon of water effect, the
price of water well owner will
at the going and lower the owner will not
increase
price will raise profit on all the raise
production
profit. other gallons sold production.
Each Oligopolist continues to increase production
until these two marginal effect exactly balance,
taking the other firm’s production as given
Each Oligopolist continues to increase production until
these two marginal effect exactly balance, taking the other
firm’s production as given
Effects of Market size to Market Outcome
The larger the number of sellers, the less concerned each seller.

Price effect
Magnitude of
DISAPPEARS,
the price
leaving only the
effect falls
Output effect

As the As the
Oligopoly Oligopoly
grows in size grows VERY
large
In extreme cases, each firm in This is why we can’t have nice
the oligopoly increase as long thingz!
OLIGOPOLISTS MAKE THEM
as the price is above the EXPENSIVE
marginal cost
Game Theory and the
Economics Of Cooperation
 Game Theory
The study of how people behave in strategic situations

Prisoners’ Dilemma
A ‘game’ between two captured
prisoners that illustrates why
cooperation is difficult to maintain
even when it is mutually beneficial.
Story
 Dominant Strategy
a strategy that is best for a player in a game regardless of the strategies chosen by other players
 OLIGOPOLIES AS A PRISONERS’ DILEMMA
01 An Oligopoly Game
02 Arms-race Game
THE PRISONERS’ DILEMMA AND THE WELFARE
OF SOCIETY
03 A Common-Resources Game
Public Policies Towards Oligopolies
Restraint of Trade & Antitrust Law
1 Sherman Antitrust Act of 1890

• Federal law Prohibiting any contract, trust, or

conspiracy in restraint of interstate or foreign
trade

• Made Monopolies Illegal

Restraint of Trade & Antitrust Law
2 Clayton Act of 1914

• provided further clarification and substance to the

Sherman Antitrust Act of 1890

• banned operations conducive to the formation of

monopolies.
Controversies over Antitrust Policy
1 Resale Price Maintenance

• Also called Fair Trade

• An contractual agreement between a

manufacturer and a distributor where the
distributor agrees to abide by stated resale price
minimums or maximums
Controversies over Antitrust Policy
2 Predatory Pricing

• An act of setting prices low in an attempt to

eliminate competition
Controversies over Antitrust Policy
3 Tying

• In order to buy one product, the consumer must

purchase another product hat exist in a separate
market
Thank you