topic8web - Econ 203 Topic 8 page 1 Topic 8 Chapter 13...

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Econ 203 Topic 8 page 1 Topic 8 Chapter 13 Oligopoly and Monopolistic Competition Oligopoly: How do firms behave when there are only a few competitors? These firms produce all or most of their industry’s output. Firms behave strategically -- Game Theory Focus on firm’s behaviour -- pricing choice or quantity choice Competition model 1: the Cournot theory Competition model 2: Van Stackelberg duopoly theory Competition model 3: the Bertrand Theory
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Econ 203 Topic 8 page 2 Monopolistic Competition Characterized by: The existence of numerous firms each producing a product that is a close, but imperfect substitute for the products of other firms free entry and exit of firms
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Econ 203 Topic 8 page 3 Oligopoly: In Chapter 12: the situation with a single firm (monopoly). The Monopolist: set price (market power) maintain an economic profit in the long run no entry of new firms Oligopoly: more than one firm in the market each firm has some market power to set price awareness of its competition in decision making process
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Econ 203 Topic 8 page 4 Ther are many theories on how firms behave in an oligopolistic market. Behaviour will be determined by pricing and quantity choices. Such choices depend on the firms in the market and on how they compete. Main focus of this chapter will be on the duopoly : two firms in the market.
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Econ 203 Topic 8 page 5 There is no single theory of oligopoly. In contrast to perfect competition or monopoly, where there is a single model, many types of oligopoly models exist. Depending on the circumstances each one of these theories may be appropriate. ¾ An oligopoly is a market structure with a limited or small number of firms.
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Econ 203 Topic 8 page 6 An example in Canada, of an oligopoly is the Chartered Banks. Each of the major firms takes account of the reaction of the others when it determines its price and output policy, since its policy will affect the others. That is, when a firm increases its price, it must anticipate the reaction of other firms in the industry. If its competition decides against a price increase, it is likely that the price increase will have to be rescinded; otherwise, its rival will pull away a large number of its customers.
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Econ 203 Topic 8 page 7 In some industries, the number of firms tends to be small, because low costs cannot be achieved unless a firm is producing an output equal to a substantial percentage of the total available market: economies of scale . (Each firm must be large relative to the market.)
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Econ 203 Topic 8 page 8 Collusive Agreements ¾ Conditions in oligopolistic industries tend to encourage collusion. This is because: 1) the number of firms is small 2) firms are aware of their interdependence If firms collude they will: 1) achieve greater profits 2) decrease their uncertainty 3) have a stronger ability to prevent entry of new firms
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Econ 203 Topic 8 page 9 Collusive arrangements are difficult to maintain and control, since the payoff from cheating on the agreement enables the cheating firm to attain even higher profits.
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This note was uploaded on 08/03/2011 for the course ECON 203 taught by Professor Okhan during the Spring '11 term at University of Victoria.

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topic8web - Econ 203 Topic 8 page 1 Topic 8 Chapter 13...

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