Oligopoly

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

PowerPoint Slides prepared by:

Andreea CHIRITESCU

Eastern Illinois University

Oligopoly

• Oligopoly
• Only a few sellers
• Offer similar or identical products
• Interdependent
• Game theory
• How people behave in strategic situations
• Choose among alternative courses of action
• Must consider how others might respond to the action he takes

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Markets with Only a Few Sellers

• Duopoly
• Oligopoly with only two members
• Decide what quantity to sell
• Price is determined on the market by the demand

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Equilibrium for an Oligopoly

• Nash equilibrium
• Economic actors interacting with one another
• Each choose their best strategy
• Given the strategies that all the other actors have chosen

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Equilibrium for an Oligopoly

• When oligopoly firms individually choose output to maximize profit
• Quantity is greater than under monopoly but less than under competition
• Price is lower than the monopoly price but higher than the competitive price (MC)

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Figure 1

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

In this game between two criminals suspected of committing a crime, the sentence that each receives depends both on his or her decision whether to confess or remain silent and on the decision made by the other

The Prisoners’ Dilemma

The Economics of Cooperation

• The prisoners’ dilemma
• Each prisoner pursues his or her own interest, so together they reach an outcome that is worse for both
• Cooperation is hard to maintain because it is individually irrational

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Economics of Cooperation

• The game oligopolists play
• Trying to reach the monopoly outcome is like the prisoners’ dilemma
• Firms are self-interested
• They fail to cooperate even though a cartel would raise profits
• Each firm has an incentive to cheat

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 2

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Jack and Jill’s Oligopoly Game

In this game between Jack and Jill, the profit that each earns from selling water depends on both the quantity he or she chooses to sell and the quantity the other chooses to sell.

OPEC and the world oil market

• Organization of Petroleum Exporting Countries (OPEC) is a cartel
• Formed in 1960: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela
• By 1973: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon
• Control about three-fourths of the world’s oil reserves

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

OPEC and the world oil market

• OPEC
• Tries to raise the price of its product
• Coordinated reduction in quantity produced
• Tries to set production levels for each of the member countries

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© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.