Briefly contrast the difference between equilibrium market outcomes in a monopoly, oligopoly and
Between monopoly and perfect competition
Even when allowed to collude, firms in an oligopoly will choose to cheat on their agreements with the
rest of the cartel. Why?
Competition, monopolies and cartels
If there is an increase in the number of firms in an oligopoly, what effect would this have on the
(a) they act independently of each other, and
(b) they collude and enforce a cartel agreement?
If there is an increase in the number of firms with no collusion, the oligopolistic market will look more
and more like a competitive market. Prices will be lower and output will be higher.
If there is an effective cartel, then the number of firms will have no effect on the price and output
supplied to the market. The price and output will be maintained at the monopoly level.
How the size of an oligopoly affects the market
Suppose three firms are in an oligopoly and each firm has a dominant production strategy. Would it be
possible to determine the Nash Equilibrium solely from knowledge about the firms’ dominant
strategies? Suppose one of the three firms is irrational and plays a strategy other than its dominant
strategy. Is it possible to determine the best course of action of the other two firms?