Lecture+21 - Announcements MT2 on Wednesday Will cover...

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Announcements MT2 on Wednesday. Will cover chapters 7-10 (no game theory) Monday will be review (after about 10-15 mins of new stuff). HW for ch10 due on Monday We won’t get through all this today but this will be on the MT (so we’ll do some lecturing on Monday) 1 of 38
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2 of 38 OLIGOPOLY oligopoly A form of industry (market) structure characterized by a few dominant firms. Products may be homogenous or differentiated. The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others.
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3 of 38 OLIGOPOLY Percentage of Value of Shipments Accounted for by the Largest Firms in High- Concentration Industries, 1997 INDUSTRY DESIGNATION FOUR LARGEST FIRMS EIGHT LARGEST FIRMS NUMBER OF FIRMS Cellulosic man-made fiber 100 4 Primary copper 95 99 11 Household laundry equipment 90 99 10 Cigarettes 99 100 9 Malt beverages (beer) 90 95 494 Electric lamp bulbs 89 94 54 Cereal breakfast foods 83 94 48 Motor vehicles 83 92 325 Small arms ammunition 89 94 107 Household refrigerators and freezers 82 97 21
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4 of 38 OLIGOPOLY OLIGOPOLY MODELS The behavior of any given oligopolistic firm depends on the behavior of the other firms in the industry comprising the oligopoly. Because many different types of oligopolies exist, a number of different oligopoly models have been developed. All kinds of oligopoly have one thing in common:
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5 of 38 OLIGOPOLY The Collusion Model of Oligopoly The colluding oligopoly will face market demand and produce only up to the point at which marginal revenue and marginal cost are equal ( MR = MC ), and price will be set above marginal cost. cartel A group of firms that gets together and makes joint price and output decisions to maximize joint profits. Basically, the oligopolists band together to act as one big monopolist. tacit collusion Collusion occurs when price- and quantity-fixing agreements among producers are explicit. Tacit collusion occurs when such agreements are implicit. collusion The act of working with other producers in an effort to limit competition and increase joint profits.
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Collusion 6 of 38 The Market Q $ MR MC D Q cartel =Q m P cartel =P m P pc Q pc
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Collusion 7 of 38 Representative Cartel Firm q $ d=MR=AR=P* AC MC P pc q pc P cartel = P m q cartel = q m Cost / Unit Profit For collusion to work, all firms must restrict their quantity.
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Collusion These firms get together and agree/conspire to act as a single seller. They act like a monopoly. The cartel seeks to find where MC=MR for the entire market . It then sets a market price for the industry equal to the monopoly price. The cartel restricts output to Q m . Because market output is restricted, each firm’s output must be restricted as well. The cartel, therefore, sets production quotas for each individual firm. Each firm cannot produce more than q m , nor is it allowed (neither is it rational) to sell below the price P m .
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