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Chapter 16
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Imperfect Competition
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Types of Imperfectly
Competitive Markets
Oligopoly
Only a few sellers, each offering a
similar or identical product to the
others.
Monopolistic Competition
Many firms selling products that are
similar but not identical.
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1
The Four Types of Market Structure
Number of Firms?
Many
firms
One Type of Products?
firm Few
firms Differentiated Identical
products products
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Characteristics of an Oligopoly
Market
Few sellers offering similar or identical
products
Interdependent firms
Best off cooperating and acting like a
monopolist by producing a small quantity of
output and charging a price above marginal
cost
There is a tension between cooperation and
self-interest.
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A Duopoly Example
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2
A Duopoly Example: Demand
Schedule for Water
Quantity Price Total Revenue
0 $120 $ 0
10 110 1,100
20 100 2,000
30 90 2,700
40 80 3,200
50 70 3,500
60 60 3,600
70 50 3,500
80 40 3,200
90 30 2,700
100 20 2,000
110 10 1,100
120 0 0
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3
Competition, Monopolies, and
Cartels
The duopolists may agree on a
monopoly outcome.
Collusion
The two firms may agree on the
quantity to produce and the price to
charge.
Cartel
The two firms may join together and act
in unison.
However, both outcomes are illegal in the United States due to
Antitrust laws.
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4
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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5
The Prisoners’ Dilemma
The prisoners’ dilemma provides
insight into the difficulty in
maintaining cooperation.
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6
Oligopolies as a
Prisoners’ Dilemma
Iraq’s Decision
High Production Low Production
Iraq gets Iraq gets
High $40 billion $30 billion
Production Iran gets Iran gets
Iran’s $40 billion $60 billion
Decision
Iraq gets Iraq gets
Low $60 billion $50 billion
Production Iran gets Iran gets
$30 billion $50 billion
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