Week10.Oligopoly.2009

Week10.Oligopoly.2009 - ECMA04 Week 10 OLIGOPOLY Oligopoly...

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Unformatted text preview: ECMA04 - Week 10 OLIGOPOLY Oligopoly is a market in which there are only a few sellers. How many? So few that they feel the effects of each other’s decisions. (cigarette companies, the banks, oil producers, steel producers, car companies, insurance companies, cereal producers, electronics, etc) When top four firms control large % of sales Four-firm concentration ratio = share of sales in hands of top four firms in industry. In Canada: Four firm concentration ratio is over 50% for Tobacco products Petroleum and coal products Transportation equipment Primary metals Beverages Metal mining - broadly defined industries e.g., Suppose we have two firms competing in a given market, producing identical output (homogeneous, standardized product - just like perfect competition). The decision each firm has to make is: “How much output should I try to sell, given what I think the other producer might try to sell?” Firm #1 decides on q 1 Firm #2 decides on q 2 Each firm has MC = AC = \$2, no matter how much they produce (that is, TC 1 = 2q 1 andTC 2 = 2q 2 ) The key to this problem is that each firm chooses its own output, but price depends on BOTH firms’ decisions TC 1 = 2q 1 and TC 2 = 2q 2 P = 14 - Q T Q T = q 1 + q 2 For example, if firm #1 chooses q 1 = 2 then if q 2 = 2, P = 10 if q 2 = 3, P = 9 if q 2 = 4, P = 8 On the other hand, if firm #1 chooses q 1 = 3 then if q 2 = 2, P = 9 if q 2 = 3, P = 8 if q 2 = 4, P = 7 So, to repeat, the outcome (your profits, if you are one of the firms) depends not only on your decision but also on the other firm’s decision How to model this kind of decision? Economists use a concept known as “Prisoners’ Dilemma” “Story”: A robbery is committed, and police catch two ex-cons whom they strongly suspect of the crime. There is some evidence, but not enough to convict them of the robbery itself. Without more evidence, the best the prosecutor can do is convict them of minor things (weapons possession, etc.) that will earn TWO YEARS in jail. TWO YEARS in jail....
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This note was uploaded on 06/11/2011 for the course ECMA 04 taught by Professor Cleverland during the Fall '09 term at University of Toronto.

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Week10.Oligopoly.2009 - ECMA04 Week 10 OLIGOPOLY Oligopoly...

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