ECON FINAL REVIEW CH 27 - From Notes in Class Oligopolistic...

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Chapter 27 1. Oligopoly is a market situation in which there are a very few sellers, each of which expects a reaction from its rivals to changes in its price and quantity; there are two major characteristics of oligopolies: a small number of firms and interdependence. 2. There are at least three reasons for the emergence of oligopolistic industries: economies of scale, barriers to entry, and merger (horizontal or vertical). a) Four- or eight- firm concentration ratios are often calculated to determine the extent to which an industry is “monopolized.” b) Over time some industries experience drastic changes (up or down) in their concentration ratios; others show little change. 3. Before an oligopoly situation can be analyzed with respect to price and output, specific assumptions about rival reactions must be made; a different model arises with each assumption regarding the oligopolist’s reaction function.
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Unformatted text preview: From Notes in Class Oligopolistic Firms 1) Mutual Interdependencies a) Price leadership- one firm takes title as the price leader. If it changes its price another firm follows (Usually the biggest firm sets price). b) Collusion- when the firms act as a single unit rather than individuals (Firms come together and discuss prices) when firms seize to act independently, they become collusive, lose competition and act as a monopoly. c) Cartel (Collusion)- providers of some products figure out one price. i. EX) OPEC- Cartel of Countries EX) DeBeer- Diamond Cartel *Collusion is illegal in America 2) Relative Price Stability Kinked Demand Curve 3) Barriers to Entry a) Mergers i. Horizontal- 2 companies producing some product combine to make one big company. ii. Vertical- merges different production methods together EX) merging raw materials with transportation and manufacturer...
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This note was uploaded on 03/19/2008 for the course ECON 004 taught by Professor Graf,pauledwin during the Spring '07 term at Pennsylvania State University, University Park.

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ECON FINAL REVIEW CH 27 - From Notes in Class Oligopolistic...

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