Together these three firms account for about 90

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Unformatted text preview: e industry is dominated by the top four firms. It is an example of an oligopolistic market. Now consider a real-world example. The U.S. automobile industry is largely made up of General Motors, Ford Motor Company, and Chrysler (or DaimlerChrysler) Corporation. Together, these three firms account for about 90 percent of American-made cars sold in the United States. Other examples of oligopolistic markets include industries that produce cigarettes, tires and inner tubes, breakfast cereals, farm machinery, and soap and detergents. 08 (186-221) EMC Chap 08 5/8/06 4:56 PM Page 213 Oligopoly and Interdependence: Looking over Your Shoulder Oligopoly differs from other market structures in terms of the number of sellers. Both perfectly competitive and monopolistic competitive markets include many sellers, and a monopolistic market has only one seller. Only an oligopolistic market consists of a few sellers. Will a seller act differently if it is one of only a few sellers than if it is one of many? Some evidence indicates that when a seller is one of only a few sellers, it is more likely to base its behavior on what other sellers do than if it is one of many sellers. Consider the airline market, which is considered to be oligopolistic. If one airline lowers its ticket prices, other airlines are likely to do the same. Cartels It is easier for the few sellers in an oligopolistic market to get together and discuss common issues than for the many sellers in either a perfectly competitive or a monopolistic competitive market to do the same. Why would sellers that compete with each other want to get together in the first place? One of the various reasons may be that they want to try to eliminate or reduce the competition they present to one another. Each year, the three major car companies compete with one another on such things as price, quality, style, and service. Over the years they realized that the competition between them actually helps the car consumer and hurts them. In the boardroom of one of the car companies, the chief executive officer (CEO) says, “Every time our competitors lower prices, we have to do the same thing; every time they come up with a new sport utility vehicle or a better or safer sedan, we have to do the same thing. All this competition is great for the consumer, but it’s not so good for our profits.” Suppose the CEO calls a meeting with the CEOs at the other two major car companies. They get together for a nice lunch somewhere and talk over their problems. At the end of the lunch they all agree that the com- The cereal market is an oligopolistic market. Can you name the firms that dominate this market? petition among them is helpful to consumers but not so helpful to them, so they should try to reduce some of this competition. Specifically, they decide to keep prices where they currently are (no more discounts) and to stop coming up with new car models for the next two years. The three CEOs have entered into a cartel agreement, an agreement that specifies that they will act in a coordinated way to reduce the competition among them and (they hope) raise their profits. In the United States, cartel agreements are illegal. But suppose that they were not illegal, so nothing prevented the CEOs from making the cartel agreement. What then? Many people would say that the CEOs would be successful at reducing their competition and increasing their profits. In other words, the cartel agreement would harm consumers and help the three car companies. This answer assumes that the three car companies would actually hold to the cartel agreement. However, firms that enter into cartel agreements often break them. To see why, put yourself in the place of one of the cartel agreement An agreement that specifies how the firms that entered into the agreement will act in a coordinated way to reduce the competition among them. Section 4 An Oligopolistic Market 213 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 214 Even if cartel agreements were not illegal, they probably would not be much of a problem for consumers. Certainly sellers in the same market might try to make cartel agreements and would want them to hold, but it is not likely that they would hold. After all, once the agreement was made, each seller that entered into it would feel a sharp monetary incentive to break it and make itself much better off at the expense of its competitors. It’s nearly impossible for companies to turn their backs on the chance to get rid of their competition. The Organization of Petroleum Exporting Countries (OPEC) is a cartel. Here OPEC president, Indonesian oil minister Purnomo Yusgiantoro, opens an OPEC meeting at its headquarters in Vienna. Why do you think cartels are illegal in the United States? three automobile company CEOs. You return to your office after lunch with the other CEOs. You start to think about the cartel agreement you just entered into and say to yourself, “I know I promised not to lower prices and not to “People of the same trade develop any new model cars, seldom meet together, even but suppose I...
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