16_Oligopoly_SV

16_Oligopoly_SV - CHAPTER 16 OLIGOPOLY 1...

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CHAPTER 16 OLIGOPOLY 1
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CHAPTER 16 OLIGOPOLY 2 Let’s start with a quick exercise:  1. Write down the name of a specific firm. It should be a real company, not hypothetical. 2. What products or services does the firm sell? If the firm sell a variety of goods, choose the single most important one. 3. What other firms compete with it? Are there many, a few, or none? 4. Do the competing firms sell exactly the same product? 5. Categorize the industry as belonging to one of the four types of market structures.
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CHAPTER 16 OLIGOPOLY 3 The Four Types of Market Structure • Tap water • Cable TV Monopoly (Chapter 15) • Novels • Movies Monopolistic Competition (Chapter 17) • Tennis balls • Crude oil Oligopoly (Chapter 16) Number of Firms? Perfect • Wheat • Milk Competition (Chapter 14) Type of Products? Identical products Differentiated products One firm Few firms Many firms
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CHAPTER 16 OLIGOPOLY 4 How to distinguish “a few” or “many”: Measuring  Market Concentration Concentration ratio : the percentage of the market’s total output supplied by its four largest firms. The higher the concentration ratio, the more likely the particular market is dominated by a few firms. As a rule of thumb, concentration ratio higher than 50 means the market is an oligopoly. This chapter focuses on oligopoly, a market structure with high concentration ratios and usually only a few firms. 0
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Concentration Ratios in Selected U.S. Industries Industry Concentration ratio Video game consoles 100% Tennis balls 100% Credit cards 99% Batteries 94% Soft drinks 93% Web search engines 92% Breakfast cereal 92% Cigarettes 89% Greeting cards 88% Beer 85% Cell phone service 82% Autos 79% 0
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CHAPTER 16 OLIGOPOLY 6 The key dynamics in an oligopoly market is whether the few firms want to coordinate on their strategies or they want to act out of their self-interests.
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CHAPTER 16 OLIGOPOLY 7 P Q $0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 EXAMPLE:   Cell Phone Duopoly in Smalltown Smalltown has 140 residents, its demand schedule is to the left The “good”: cell phone service Two firms: Cingular, Verizon, each deciding how much phone services to provide (choosing Q) ( duopoly : an oligopoly with two firms) Each firm’s costs: FC = $0, MC = $10 0
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CHAPTER 16 OLIGOPOLY 8 50 45 60 40 70 35 80 30 90 25 100 20 110 15 120 10 130 5 140 $0 Q P 1,750 1,800 1,750 1,600 1,350 1,000 550 0 –650 –1,400 Profit 500 600 700 800 900 1,000 1,100 1,200 1,300 $1,400 Cost 2,250 2,400 2,450 2,400 2,250 2,000 1,650 1,200 650 $0 Revenue EXAMPLE:   Cell Phone Duopoly in Smalltown Competitive outcome: P = MC = $10 Q = 120 Profit = $0 Monopoly outcome: P = $40 Q = 60 Profit = $1,800 0
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CHAPTER 16 OLIGOPOLY 9 In terms of combined profit, these firms’ best strategy is: collusion Collusion : an agreement among firms in a market about quantities to produce or prices to charge so as to imitate the monopoly outcomes Cartel
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16_Oligopoly_SV - CHAPTER 16 OLIGOPOLY 1...

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