Taking the first best solution for x x and satisfying

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Unformatted text preview: y good in the presence of institutional constraints. That is, either we meet all of the conditions of Pareto optimality (and have a Pareto optimal solution) or we do not meet them all (and do not have a Pareto optimal solution). There is no middle choice. The theory of Second Best suggests to us that the "piecemeal" approach to economic policy (that is, to remove part of the distortions in the economy) might end up resulting in a welfare reducing situation. 280 ECON 301 LECTURE #16 Oligopoly The term oligopoly covers a variety of market structures and market behaviours. As a result, there does not exist a definitive model of oligopoly. However, the following assumptions capture the essential elements of this market structure. ASSUMPTION #1: There are few sellers of the product. In some cases, all of these "few" sellers are large firms (like in car manufacturing). However, more often there are a couple of large firms and some small firms in the industry (like in the brewing industry). One of the most studied special cases is that of a single, large, low-cost "dominant firm" that acts as a leader to the group of follower firms (Stackelberg leadership model). ASSUMPTION #2: There are significant barriers to entry into the industry. The presence of these significant barriers to entry accounts for the small number of firms in oligopolistic industries. Entry prevention is often made possible by the cost advantages realized by the existing firms. C,P ATC (potential entrants) MC P0 P1 ATC (existing firms) MR X0 D X First, let's consider the case of a well established firm that has lower costs per unit (ATC) than potential entrants. By charging a price such as P1 the established firm would more than cover its own costs while preventing potential entrants from operating at even normal profits. 281 This sort of barrier to entry is difficult to continue in the long-run unless the existing firms have considerable monopoly-like power over resources and/or technology. Somet...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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