Oligopoly - Norton Media Library Chapter 13 Oligopoly W....

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Chapter 13 Oligopoly Norton Media Library W. Bruce Allen Neil A. Doherty Keith Weigelt Edwin Mansfield
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Competition Among the Few Definition: Oligopoly is a market structure in which there are only a few firms. Price and output depend on the behavior of rivals. For example, automobile industry, US oil industry (few refineries comprise he whole industry). Why do oligopolies exist? Mostly because of economies of scale (low costs are achieved when producing a substantial percentage of the total market output).
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There is high rivalry among firms in oligopolies – expect a reaction of other firms in the industry when a price strategy is implemented. There is also a high deal of uncertainty. It is very common for oligopolistic firms to build collusions (because the number of firms is small and they are aware of their interdependence). Firms collude to build strategies to increase profits, decrease uncertainty and prevent entry of other firms to the industry. If open and formalized, collusions are called Cartels.
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Analysis of Cartels A cartel is a group of firms that imitates monopoly. The idea is this: since a monopoly maximizes industry profits it should be imitated. The cartel must include a mechanism for dividing up profits among the firms. (Notice that cartels are illegal under U.S. anti-trust statutes, with exceptions).
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Cartel Solution A “perfect” cartel sets industry MR equal to the sum of member firms’ MCs. The MC of the oligopoly is the sum of the MC of the individual firms, assuming costs of inputs do not increase as output expands. • The firms jointly fix price P 0 instead of the lower price that they would establish acting as competitors. Then they divide the resulting profits based on their share in production.
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Defection Since each firm acting alone faces nearly constant P m , provided the other firms maintain their monopolist price, the incentive for every firm is to break the agreement, leave the cartel and expand output. Another option is to secretly charge a slightly
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Oligopoly - Norton Media Library Chapter 13 Oligopoly W....

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