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Oligopoly

# Oligopoly - 151 Chapter15Oligopoly KeyFeatures Examples 152...

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Chapter 15 – Oligopoly Key Features: Examples 15-1

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Kinked Demand Curve Model Specifically: 15-2
Diagram 4: The Kinked Demand Curve Arti cle Article III. Q Article VIII. D Article VI. MR Article VII. M Article V. D Articl e IV. Arti cle 15-3

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Article I. Diagram 4:  The Kinked Demand Curve Articl e IX. Article XVI. Q Article X. D Article XII. MR Article XI. M Article Articl e XV. Article XIV. E 15-4
Article II. Diagram 4:  The Kinked Demand Curve Articl e Article XXVII. Article XVIII. Article XXVI. Article XIX. M Article XX. D Articl e Arti cle Article XXIII. Article XXIV. Article XXII. 15-5

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Note: Advantages of the Model Weaknesses of Model 15-6
Dominant Firm Oligopoly Most useful for industries with: o Firms that differ in size 15-7

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Diagram 5:  The Dominant Firm Oligopoly Model Arti cle Articl e 15-8
Weaknesses of Model: Game Theory 15-9

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Prisoners’ Dilemma Rules Strategies 15-10
Pay-0ffs Outcome 15-11

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Nash Equilibrium Table 1:   The Prisoners’ Dilemma Payoff Matrix \$2m \$4.5m \$-1m \$0m Comply \$2m \$-1m \$4.5m \$0m 15-12
Bonnie must decide what to do: o If Clyde confesses: o If Clyde denies: 15-13

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(This is called a dominant strategy because it works no matter  what action the other player takes) 15-14
Table 1:   The Prisoners’ Dilemma Payoff Matrix 15-15

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Clyde has the same choice: o If Bonnie confesses: o If Bonnie denies:  15-16
Oligopoly Game o Cartel  o Firms have 2 choices: 15-17

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To work out the pay-off matrix, we need to know the cost and  demand conditions. See Diagram 6:  Costs and Demand 15-18
Article III. Diagram 6:  Costs and Demand Article IV. 15-19

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15-20
Both Firms Comply:  o See Diagram 7:  Colluding to Make Monopoly Profits Both Firms Cheat:  o See Diagram 8:  Both Firms Cheat Firm A(B) Cheats and Firm B(A) Complies: 15-21

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o See Diagram 9:  One Firm Cheats 15-22
Article V. Diagram 7:  Colluding to Make Monopoly Profits  Article VI. Article VII. Article VIII. 15-23

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Article IX.  Diagram 8:  Both Firms Cheat Article X. Article XI.   15-24
Article XII.  Diagram 9:  One Firm Cheats Article XIII. 15-25

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Table 2:  Duopoly – Average Total Cost, Price, Profit and Loss Gear Trick ATC 8000 ATC 6000 Price 7500 Price 7500 Loss (ATC - Price) 500 per unit 2000 x 500 = 1.0 m Profit (Price – ATC) 1500 per unit 3000 x 1500 = 4.5m Quantity 2000 Quantity 3000 15-26
Table 3:   The Duopoly Payoff Matrix 15-27

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Firm A must decide what to do: o If Firm B complies: o If Firm B cheats: 15-28
Table 3:  The Duopoly Payoff Matrix 15-29

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Firm B has the same choice: o If Firm A complies: o If Firm A denies:  15-30
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Oligopoly - 151 Chapter15Oligopoly KeyFeatures Examples 152...

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