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Principles of Economics- Mankiw (5th) 362

Principles of Economics- Mankiw (5th) 362 - 372 PA R T F I...

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372 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY oligopoly and how cooperative the firms are. The story of the prisoners’ dilemma shows why oligopolies can fail to maintain cooperation, even when cooperation is in their best interest. Policymakers regulate the behavior of oligopolists through the antitrust laws. The proper scope of these laws is the subject of ongoing controversy. Although price fixing among competing firms clearly reduces economic welfare and should be illegal, some business practices that appear to reduce competition may have le- gitimate if subtle purposes. As a result, policymakers need to be careful when they use the substantial powers of the antitrust laws to place limits on firm behavior. Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms
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