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chapter15 - > Oligopoly CAUGHT IN THE ACT 15 What the...

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chapter 363 15 >> he agricultural products company Archer Daniels Midland (also known as ADM) likes to describe itself as “supermarket to the world.” Its name is familiar to many Americans not only because of its important role in the economy but also because of its advertising and sponsorship of public television pro- grams. But on October 25, 1993, ADM itself was on camera. On that day executives from ADM and its Japanese competitor Ajinomoto met at the Marriott Hotel in Irvine, California, to discuss the market for lysine, an additive used in animal feed. (How is lysine pro- duced? It’s excreted by genetically engineered bac- teria.) In this and subse- quent meetings, the two companies joined with sev- eral other competitors to set targets for the market price of lysine. Each company also agreed to limit its pro- duction in order to achieve those targets. Agreeing on specific limits would be their biggest challenge—or so they thought. What the participants in the meeting didn’t know was that they had a bigger problem: the FBI had bugged the room and was filming them with a camera hidden in a lamp. Oligopoly CAUGHT IN THE ACT T What you will learn in this chapter: The meaning of oligopoly, and why it occurs Why oligopolists have an incen- tive to act in ways that reduce their combined profit, and why they can benefit from collusion How our understanding of oli- gopoly can be enhanced by using game theory, especially the idea of the prisoners’ dilemma How repeated interactions among oligopolists can help them achieve tacit collusion How oligopoly works in practice, under the legal constraints of antitrust law What the companies were doing was illegal. To understand why it was illegal and why the companies were doing it anyway, we need to examine the issues posed by industries that are neither perfectly compet- itive nor pure monopolies. In this chapter we focus on oligopoly , an industry in which there are only a few producers. As we’ll see, oligopoly is a very important reality—much more important, in fact, than monopoly and arguably more typical of modern economies than perfect competition. Although much that we have learned about both perfect competition and monopoly is relevant to oligopoly, oligopoly also raises some entirely new issues. Among other things, firms in an oligopoly are often tempted to engage in the kind of behavior that got ADM, Ajinomoto, and other lysine producers into trouble with the AP/Wide World Photos The law catches up with a colluding oligopolist.
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An oligopoly is an industry with only a small number of producers. A producer in such an industry is known as an oligopolist. When no one firm has a monopoly, but producers nonetheless realize that they can affect market prices, an industry is characterized by imperfect competition.
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