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Unformatted text preview: CHAPTER 17: OLIGOPOLY 1. Oligopoly DEF : OLIGOPOLY: A market structure in which only a few sellers offer similar or identical products. Features of Oligopolistic Markets: Few sellers Product may be homogenous or differentiated Barriers to entry and exit Key characteristic is mutual interdependence between firms - The behavior of any given oligopolistic firm depends on the behavior of the other firms in the industry. Measure degree of competitiveness by four-firm concentration ratio : the percentage of total output in the market supplied by the four largest firms . Highest for US are cigarettes, batteries, breweries, light bulbs, etc. Monopoly Oligopoly Perfectly Competition The number of firms One Few many Products Identical Example Tap water, CATV Tennis balls cigarettes Wheat, milk Only small group of sellers tension b/w cooperation and self-interest 1) Cooperation The group of oligopolists is best off cooperating and acting like a monopolist. Thus, they will produce a small quantity of output and charging a price above mc. 2) self-interest However, each oligopolist cares only about its own profit, they have incentives to cheat on cooperation agreement. 2. Markets with only a Few Sellers: The Duopoly Example: consider an oligopoly with only two members, called a duopoly. o A&B supply water. Assume mc of producing a gallon of water is zero. Q P TR MR 12- Page 1 of 5 1 11 11 11 2 10 20 9 3 9 27 7 4 8 32 5 5 7 35 3 6 6 36 1 7 5 35-1 8 4 32-3 9 3 27-5 10 2 20-7 11 1 11-9 12-11 o Equilibrium P and Q in perfect competition P=MC=MR=O Q=12. (Remember in Perfect Competition, firms are price takers, so MR = P) o Equilibrium P and Q in a monopoly Profit maximizing quantity at MR=MC Q=6, and P=$6. (Why? If P>6, then MR>MC. If P<6, then MR<MC)....
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