Chapter 13

Chapter 13 - Chapter 13- Oligopoly: Firms in Less...

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Chapter 13- Oligopoly: Firms in Less Competitive Markets Oligopoly- a market structure in which a small number of interdependent firms compete When large firms cut their prices, their rivals in the industry respond by also cutting their prices Because we don’t know marginal revenue, we cant calculate the profit-maximizing level of output and the profit maximizing price the way we do for competitive firms Game theory- used to analyze competition among oligopolists It is the study of the decisions of firms in industries where profits of each firm depend on its interactions with other firms Oligopoly and Barriers to Entry An oligopoly is an industry with only a few firms Most economists believe that a four-firm concentration ratio greater than 40% indicates that an industry is an oligopoly Concentration ratio has flaws 1. Concentration ratios do not include sales in the US by foreign firms 2. Concentration ratios are calculated for the national market, even though the competition in some industries is mainly local 3. Competition sometimes exists between firms in different industries Barriers to Entry New firms often have difficulty entering an oligopoly Barriers to Entry- anything that keeps new firms from entering an industry in which firms are earning economic profits 3 barriers to entry are economies of scale, ownership of a key input, and government- imposed barriers Economies of Scale Economies of scale- the situation when a firm’s long-run average costs fall as it increases output This is the most important barrier to entry The greater the economies of scale, the smaller the number of firms that will be in the industry Ownership of a Key Input If production of a good requires a particular input, then control of that input can be a
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This note was uploaded on 02/21/2012 for the course EC 101 taught by Professor Idson during the Fall '08 term at BU.

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Chapter 13 - Chapter 13- Oligopoly: Firms in Less...

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