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141_Chapter_14_Lecture_Outline - CHAPTER 14 BRIEF CHAPTER...

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CHAPTER 14 BRIEF CHAPTER OUTLINE Market Structure in an Oligopoly p. 284 Oligopoly Models p. 287 The Collusion Model The Price-Leadership Model The Cournot Model Game Theory p. 290 Repeated Games A Game with Many Players: Collective Action Can Be Blocked by a Prisoner’s Dilemma Oligopoly and Economic Performance p. 297 Industrial Concentration and Technological Change The Role of Government p. 298 Regulation of Mergers A Proper Role? DETAILED CHAPTER OUTLINE I. Introduction, pages 283-284 A. Most industries in the United States fall between the two extremes of perfect competition and monopoly. B. This chapter discusses oligopoly , a form of industry (market) structure characterized by a few dominant firms. Products may be homogenous or differentiated. C. Chapter 15 covers monopolistic competition. II. Market Structure in an Oligopoly, pages 284-287 A. This is an industry dominated by a few firms that, because of their sizes, are large enough to influence the market price. In some oligopoly markets products are differentiated; in others they are nearly homogeneous. Some markets have only a few firms (a concentrated industry), whereas others have many firms but a few large ones dominate. A complex interdependence exists among firms in these industries; the behavior of any one firm depends on the reactions it expects from the others. B. Michael Porter’s Five Forces model helps us understand the five competitive forces that determine the level of competition and profitability in an industry. Figure 14.1 (following) is the standard presentation of Porter’s model. 1. The center box of the figure focuses on the competition among the existing firms in the industry. In the competitive market, that box is so full of competitors that no individual firm needs to think strategically about any other individual firm. In the case of monopoly, the center box has only one firm. In an oligopoly, there 163
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164   Principles of Microeconomics are a small number of firms and each of those firms will spend time thinking about how it can best compete against the other firms. 2. Consider the firms currently in the industry. How competitive is an industry likely to be? a. One important structural feature is the number and size distribution of those firms. Do the top two firms have 90 percent of the market or only 20 percent? Is there one very large firm and a few smaller competitors, or are firms similar in size? b. Economists use a concentration ratio , the share of industry output in sales or employment accounted for by the top firms. The common concentration ratios are the sums of the market shares of the four largest firms and the eight largest firms.
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