CHAPTER 17:

OLIGOPOLY

PRINCIPLES OF ECONOMICS, 7TH EDITION

N. GREGORY MANKIW
 OLIGOPOLY

Oligopoly is a market structure in which only a few

sellers offer similar or identical products.
Strategic Behavior in Oligopoly:
A firm's decision about P and Q can affect other
firms and causes them to react. the firm will
consider these reactions when making decisions.
Game theory: is the study of how people behave in
strategics situation
 DUOPOLY

--- A Oligopoly with only two members.

An example of duopoly outcome:

Cullusion: an agreement among firms in a market about
quantities to produce or prices to charge.
Example: The T-Mobile and Verizon could agree to
each produce half of the monopoly output:
-- for each firm: Q=30, P=$40, profits= $900
the price and quantity in a monopoly market would be
where total profit is maximized: 
Cartel: a group of firms acting in unison.
example: T-Mobile and Verizon in the outcome with
collusion.
 COLLUSION VS. SELF-INTEREST
BOTH FIRMS WOULD BE BETTER OFF
IF BOTH STICK TO THE CARTEL
AGREEMENT.
BUT EACH FIRM HAS INCENTIVE TO
RENEGE ON THE AGREEMENT.
LESSON:
IT IS DIFFICULT FOR OLIGOPOLY
FIRMS TO FORM CARTELS AND HONOR
THEIR AGREEMENTS.
 Although oligopolists would like to form
cartels and earn monopoly profits, often
that is not possible.
Anti-trust laws prohibit explicit agreements
among oligopolists as a matter of public
policy.
 NASH EQUILIBRIUM
---a situition in which economic actors interacing with one
another each choose their best strategy given the strategies
that al the others have chosen.

THE when firms in an oligopoly individually choose production

to maximize profit, they produce a quantity of output
EQUILIBRIUM greater than the level produced by monopoly and less
than the level produced by competition.
FOR AN An oligopoly price is less than the monopoly price but greater
OLIGOPOLY than the competitive price (which equals marginal cost).
 A COMPARISON OF MARKET OUTCOMES
When firms in an oligopoly choose production to maximize
profit,
oligopoly Q is greater than monopoly Q but smaller than
competitive Q.
oligopoly P is greater than competitive P but less than
monopoly P.

THE OUTPUT AND PRICE EFFECTS

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 rises 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.
 GAME THEORY
- game theory helps us understand oligopoly
and other situations where "players" interact
and behave strategically.
--- DOMINANT STRATEGY: a strategy that is
best for a player in a game regardless of the
strategies chosen by the other players.
--- PRISONERS' DILEMMA: a "game" between
two captures criminals that illustrates why
cooperation is difficult even when it is mutually
beneficial.
Public Policy Toward
Oligopolies
 SUMMARY The prisoners' dilemma shows that self-
interest can prevnt people from
Oligopolists maximixe their total profits
maintaining cooperation, even when
by forming a cartel and acting like a
cooperation is in their mutual self-
monopolist.
interest.

The logic of the pridoners' dilemma

applies in many situations,including
oligopolies.
If oligopolies make decisions about
production levels individually, the result
Policymakers use the antitrust laws to
is a greater quantity and a lower price
prevent oligopolies from engaging in
than under the monopoly outcome.
behavior that reduces competition.