Chapter 15 - Chapter 15: Oligopoly I. What is Oligopoly a....

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Chapter 15: Oligopoly I. What is Oligopoly a. Market structure where natural/legal barriers prevent entry and exit, and a small # of firms exist b. Barriers to Entry b.i. Natural oligopoly arrives the same way as a natural monopoly b.ii. Legal oligopoly arrives when legal barrier to entry protects smll # of firms b.iii. Duopoly-an oligopoly market with two firms c. Small Number of Firms c.i. Interdependence-each firm’s actions influence the π’s of other firms c.ii. Temptation to Cooperate-increase π’s by forming cartel (a group of firms acting together [colluding] to limit output, raise price, and increase illegal & tend to break down II. Two Traditional Oligopoly Models a. The Kinked Demand Curve Model a.i. Based on the assumption that each firm believes that if it raises its P, others will not follow, but if it cuts its P, other firms will cut their P a.ii. Creates a break in the MR curve a.iii. If MC fluctuates between break in MR, the firm doesn’t change it’s P or Q because P & Q are insensitive to small price changes b. Dominant Firm Oligopoly b.i. Arises when the dominant firm has a big cost advantage over the other firms and produces a large part of the industry output—sets market price, and other firms are price takers III. Oligopoly Games a. Game theory-a tool for studying strategic behavior (behavior that takes into account the expected behavior of others & recognition of mutual interdependence) b. What is a Game? b.i. “prisoners’ dilemma”-captures the essential features of many games, including oligopoly & gives good illustration of how game theory works and how to generate predictions b.ii. Prisoners’ Dilemma b.ii.1. Rules: each prisoner (player) is placed in a separate room and can’t communicate with the other prisoners b.ii.2. Strategies: all possible actions of each player b.ii.3. Payoffs: payoff matrix-table that shows the payoffs for every possible action by each player for every possible action by
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Chapter 15 - Chapter 15: Oligopoly I. What is Oligopoly a....

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