Ch15_class - Principles of Microeconomics Econ 2005 Week...

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Principles of Microeconomics Econ 2005 Week 12, Lecture 1 Oligopoly (ch 15)
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Outline What happens when there are several large  firms—oligopoly Interdependence Collusion versus non-cooperative behavior Benefits of collusion Game theory applied to oligopoly behavior Factors that enhance cartel stability Market transparency to identify cheaters easily Ability to punish cheaters Antitrust policy 
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Oligopoly Oligopoly  is a common market structure. It arises  from the same forces that lead to monopoly,  except in weaker form. It is an industry with only a  small number of producers.  4-firm concentration ratio When no one firm has a monopoly, but producers  nonetheless realize that they can affect market  prices, an industry is characterized by  __________________.
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Understanding Oligopoly Duopoly – simplest case of oligopoly How will firms interact?  One possibility is that the two companies will engage in  collusion — Sellers engage in  collusion  when they  cooperate to raise each others’ profits.  The strongest form of collusion is a  cartel ,   an agreement  by several producers that increases their combined profits  by telling each one how much to produce. They may also engage in  non-cooperative behavior  -    each player ignoring the effects of his actions on the   other’s profits.
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Competing in Prices vs. Competing in Quantities Firms may decide to engage in  quantity  or  price   competition. Quantity competition  (or the  Cournot model When firms are restricted in how much they can  produce, it is easier for them to avoid excessive  competition and to “divvy up” the market They can price above marginal cost and earn  profits.  It is easier for them to achieve an outcome that  looks like collusion without a formal agreement.
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Competing in Prices vs. Competing in Quantities
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This note was uploaded on 03/30/2008 for the course ACIS 2116 taught by Professor Cmeasterwood during the Spring '08 term at Virginia Tech.

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Ch15_class - Principles of Microeconomics Econ 2005 Week...

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