Ch13B - CHAPTER 13 B Oligopoly After studying this chapter...

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Oligopoly CHAPTER 13B
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After studying this chapter you will be able to Define and identify oligopoly Explain two traditional oligopoly models Use game theory to explain how price and output are determined in oligopoly Use game theory to explain other strategic decisions
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PC War Games In some markets there are only two firms. Computer chips are an example. The chips that drive most PCs are made by Intel and Advanced Micro Devices. How does competition between just two chip makers work? Do they operate in the social interest, like the firms in perfect competition? Or do they restrict output to increase profit, like a monopoly?
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What Is Oligopoly? The distinguishing features of oligopoly are Natural or legal barriers that prevent entry of new firms A small number of firms compete
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What is Oligopoly? Barriers to Entry Either natural or legal barriers to entry can create oligopoly. Figure 13.9 shows two oligopoly situations. In part (a), there is a natural duopoly —a market with two firms.
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What is Oligopoly? In part (b), there is a natural oligopoly market with three firms. A legal oligopoly might arise even where the demand and costs leave room for a larger number of firms.
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What is Oligopoly? Small Number of Firms Because an oligopoly market has a small number of firms, the firms are interdependent and face a temptation to cooperate. Interdependence: With a small number of firms, each firm’s profit depends on every firm’s actions. Cartel: A cartel and is an illegal group of firms acting together to limit output, raise price, and increase profit. Firms in oligopoly face the temptation to form a cartel, but aside from being illegal, cartels often break down.
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What is Oligopoly? Examples of Oligopoly Figure 13.10 shows some examples of oligopoly. Four largest firms Next four largest firms Next 12 largest firms An HHI that exceeds 1,000 is usually an oligopoly. An HHI below 1,000 is usually monopolistic
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Two Traditional Oligopoly Models The Kinked Demand Curve Model In the kinked demand curve model of oligopoly, each firm believes that if it raises its price, its competitors will not follow, but if it lowers its price all of its competitors will follow.
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Figure 13.11 shows the kinked demand curve model. The firm believes that the demand for its product has a kink at the current price and quantity. Two Traditional Oligopoly Models
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Two Traditional Oligopoly Models Above the kink, demand is relatively elastic because all other firm’s prices remain unchanged. Below the kink, demand is relatively inelastic because all other firm’s prices change in line with the price of the firm shown in the figure.
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Two Traditional Oligopoly Models The kink in the demand curve means that the MR curve is discontinuous at the current quantity— shown by that gap AB in the figure.
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Two Traditional Oligopoly Models This slide helps to envisage why the kink in the demand curve puts a break in the marginal revenue curve.
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Two Traditional Oligopoly Models Fluctuations in
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Ch13B - CHAPTER 13 B Oligopoly After studying this chapter...

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