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# Chap_17 - Concentration ratio the percentage of the markets...

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OLIGOPOLY 1 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 less competition. This chapter focuses on oligopoly, a market structure with high concentration ratios. 0

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Concentration Ratios in Selected U.S. Industries 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
OLIGOPOLY 3 Oligopoly Oligopoly : a market structure in which only a few sellers offer similar or identical products. Strategic behavior in oligopoly: A firm’s decisions about P or Q can affect other firms and cause them to react. The firm will consider these reactions when making decisions. Game theory : the study of how people behave in strategic situations.

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OLIGOPOLY 4 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 The “good”: cell phone service with unlimited anytime minutes and free phone Smalltown’s demand schedule Two firms: T-Mobile, Verizon ( duopoly : an oligopoly with two firms) Each firm’s costs: FC = \$0, MC = \$10 0
OLIGOPOLY 5 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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OLIGOPOLY 6 EXAMPLE:   Cell Phone Duopoly in Smalltown One possible duopoly outcome: collusion Collusion : an agreement among firms in a market about quantities to produce or prices to charge T-Mobile and Verizon could agree to each produce half of the monopoly output: For each firm: Q = 30, P = \$40, profits = \$900 Cartel : a group of firms acting in unison, e.g., T-Mobile and Verizon in the outcome with collusion 0
A C T I V E  L E A R N I N G   A C T I V E  L E A R N I N G   1 1         Collusion vs. self-interest Collusion vs. self-interest 7 Duopoly outcome with collusion: Each firm agrees to produce Q = 30, earns profit = \$900. If T-Mobile reneges on the agreement and produces Q = 40, what happens to the market price? T-Mobile’s profits? Is it in T-Mobile’s interest to renege on the agreement? If both firms renege and produce Q = 40, determine each firm’s profits. P Q \$0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 0

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If both firms stick to agreement, each firm’s profit = \$900 If T-Mobile reneges on agreement and produces Q = 40: Market quantity = 70, P = \$35 T-Mobile’s profit = 40 x (\$35 – 10) = \$1000 T-Mobile’s profits are higher if it reneges.
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