Review Question

•Contrast the most important conditions

between a free market and a monopolistic
market.
 Oligopoly
PhD. Enrique Navarrete Bolaños
Objective
• To understand the logic in a market situation in which
there are a few producers of a given product or
service.
Introduction
Introduction
• In an oligopolistic market there are few companies
that provides a certain product.
• There are many buyers
• Consumers are price takers
• Producers are price makers
• Products are homogeneous.
Introduction

Oligopolistic
Market

Many buyers Goods offered

Few firms can
are
few seller enter/exit
Homogeneous
Introduction
• In an oligopolistic market there are few companies
that can offer a product or service and these products
are homogeneous.
• Competition among these companies is intense and it
is called monopolistic competition.
• Examples
• Wilson, Penn, Dunlop or Spalding
• Telcel, Movistar, At&T (Nextel, Iusacell)
• Windows, Apple, Linux
Production Determination
Comparison
$

AC
$2.0

D
$0.9 S=Average Cost
S=Marginal Cost

MR

300 Q
Oligopoly
• When a company enters a monopolistic market,
profits decreases for three reasons:
• 1. The market price drops
• 2. The quantity produced by the firm decreases
• 3. The firm´s average cost of production increases
Comparison
$

AC
$2.0
$1.8

D
$1.0
$0.9 S=Marginal
Cost

MR

200 300 Q
Duopoly
• In a duopolistic market there are two companies that
can offer a product or service and these products are
homogeneous.
• To determine the amount of product the two
companies can:
• Get together and agree on the quantity and the price to
charge. This act is called collusion and what results of this
association is called a cartel.
Duopoly
• An arrangement in which companies conspire to fix the
price of a product or service is called price fixing.
• Companies can compete for the market by using price
strategies in which case the quantity produced will be less
than the monopoly and this will also reduce the price.
Duopoly
• When a cartel commits price
fixing, it can obtain profits as a
monopolistic market.
• When two companies compete
they reduce production and price.
Game Theory
Game Theory
• Game theory is the study of how people behave in
strategic situations.
• Strategy is a situation in which a person, when
choosing among different options, must consider how
others might respond to his action.
Game Theory
• Class room exercise.
• Prisoner´s dilemma game. Source: Holt C.A. and Capra M.
2000 “Classroom Games: a Prisoner Dilemma”, Journal of
Economic Education 31 (Summer) 229-236.
Game Theory
• We are going to play a card game in which everybody will
be matched with someone in opposition. I will now give
each of you a pair of plain white cards, one labelled red
and one labelled black.
• You will be asked to play one of these cards by holding it to
your chest (so we can see that you have made your
decision but not what that decision is).
• Your earnings are determined by the card that you play and
by the card played by the person matched with you.
Game Theory

Name
Your Card Other´s Card
Round (R or B) (R or B) Your Earnings
1
2
3
4
5
Total
Game Theory
• Round 1 Payoffs

Other´s
Self´s Card Card Self Other
R B $5 $0
R R $2 $2
B B $3 $3
B R $0 $5
Game Theory
• Round 2 Payoffs

Other´s
Self´s Card Card Self Other
R B $10 $0
R R $2 $2
B B $8 $8
B R $0 $10
Game Theory
• Round 3-5 Payoffs

Other´s
Self´s Card Card Self Other
R B $15 $0
R R $2 $2
B B $13 $13
B R $0 $15
A Prisoners Dilemma
• Two prisoners´, Bonnie and Clyde who have been
captured by the police, can easily be convicted for
minor crime of carrying an unregistered gun, so that
each will spend one year in prison.
• The police strongly believes that Bonnie and Clyde
committed a bank robbery but don´t have any
evidence.
A Prisoners Dilemma
• The police questions Bonnie and Clyde in separate
rooms and make them the following proposal.
• “Right now, we can lock you up for 1 year. If you
confess to the bank robbery and implicate your
partner, however, we will give you immunity and you
can go free. Your partner will get 20 years in jail. But if
you both confess to the crime, we won´t need your
testimony and we can avoid the cost of a trial, so you
will each get an intermediate sentence of 8 years.
A Prisoners Dilemma

Bonnie´s Decision

Confess Remain Silent

Clyde´s
Decision Confess 8 years 8 years Goes Free 20 years

Remain
Silent 20 years Goes Free 1 Year 1 Year
A Prisoners Dilemma
• Cooperation between the two prisoner´s (meaning
that both remain silent) is difficult to maintain,
because it is individually irrational.
• There is a dominant strategy in which each individual
is better off confessing.
Duopoly Game
• two firms produce the same good, for which each firm
charges either a low price or a high price. Each firm
wants to achieve the highest possible profit. If both
firms choose High then each earns a profit of $1000.
• If one firm chooses High and the other chooses Low
then the firm choosing High obtains no customers and
makes a loss of $200, whereas the firm choosing Low
earns a profit of $1200 (its unit profit is low, but its
volume is high). If both firms choose Low then each
earns a profit of $600.
Duopoly Game
Company B

High Low

Company A High 1000, 1000 -200, 1,200

Low 1,200, -200 600, 600