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Oligopoly

Oligopoly. These SIX movie studios own 90% of the movie market!. What is so unique about the firms in an oligopoly market structure?. Oligopoly. Characteristics of an oligopoly market Few sellers offering similar or identical products Interdependent firms React to competitors actions.

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Oligopoly

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  1. Oligopoly These SIX movie studios own 90% of the movie market!

  2. What is so unique about the firms in an oligopoly market structure?

  3. Oligopoly • Characteristics of an oligopoly market • Few sellers offering similar or identical products • Interdependent firms • React to competitors actions

  4. GAME THEORY • Game theory is the study of how people behave in strategic situations. • Oligopolies are constantly playing a “game” with their competitors….

  5. Let’s play a little game theory…

  6. Game Theory: Cheating Students • I believe that you both have vandalized the school. • You have two options • You can remain silent and I can issue you a 1 hour detention • You can confess and implicate your partner, you will be granted immunity and your partner will get a 4 hour Saturday School • If both confess, that will save me the trouble of gathering evidence so you both will get a 2 hour detention

  7. Student B gets 4 hour Sat. Student B gets 2 hour Student A gets 2 hour Student A goes free Student B goes free Go free Go free Student A get 4 hour Sat. Game Theory: Vandalizing Students Student B Decision Confess Remain Silent Confess Student A Decision Remain Silent

  8. Oligopolies and Game Theory • Each firm has an incentive to cheat to benefit at the other firm’s expense • When both firms cheat, both are worse off then they would have been if neither cheated

  9. Pepsi and Coke Game Theory • What’s Coca Cola’s best decision? • What’s Pepsi’s best decision? • What is the decision that will ultimately be made? (The Nash Equilibrium)

  10. Coke gets $1,500 profit Coke gets $1,600 profit Pepsi gets $2,000 profit Pepsi gets $1,600 profit Coke gets $2,000 profit Coke gets $1,800 profit Pepsi gets $1,500 profit Pepsi gets $1,800 profit Pepsi and Coke’s Payoff Matrix Coke’s Decision High Production: 40 Gal. Low Production: 30 gal. High Production 40 gal. Pepsi’s Decision Low Production 30 gal.

  11. Collusion • Agreement among producers to divide market, set prices, or limit production • Illegal in the United States (antitrust laws)

  12. Cartels • Formal organization of producers that act in unison after a collusion agreement • Illegal in the United States

  13. U.S. at risk U.S. at risk and weak USSR at risk USSR safe and powerful U.S. safe and powerful U.S. safe USSR at risk and weak USSR safe An Arms-Race Game Decision of the United States (U.S.) Arm Disarm Arm Decision of the Soviet Union (USSR) Disarm

  14. How the Size of an Oligopoly Affects the Market Outcome • As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. • The price approaches marginal cost, and the quantity produced approaches the socially efficient level.

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