RECAP Microeconomics Section 3

OLIGOPOLY

Presented by:
Davith Chien
Contents
Introduction
O
L 17-1 Markets with Only a Few Sellers
I
G 17-2 The Economics of Cooperation
O
17-3 Public Policy toward Oligopolies
P
O Case study
L
Y Conclusion
Introduction

Oligopoly: a market structure in which only a few

sellers offer similar or identical products.

Game theory: the study of how people behave in

strategic situations.
 17.1 Markets with Only a Few Sellers

● A key feature of oligopoly is the tension between cooperation and self-interest

because an oligopolistic market has only a small group of sellers.

17.1a A Duopoly Example

● A type of oligopoly where two firms have dominant or exclusive control over a market
is called Duopoly.
17.1a A Duopoly Example
 17.1b Competitions, Monopolies, and Cartels

● Cartel is an association of manufacturers or suppliers with the purpose of

maintaining prices at a high level and restricting competition.

● Collusion is refers to conduct where firms cooperate over time to raise prices above
competitive levels.
 17.1c The equilibrium for an Oligopoly
● It is often impossible for two companies to form cartels and earn monopoly profits.

● Nash Equilibrium is a decision-making theorem within game theory that states a

player can achieve the desired outcome by not deviating from their initial strategy.
 17.1d How the Size of an Oligopoly Affects the Market outcome

● If Airbus and Boeing form a cartel, they would try to maximize total profit by
producing the monopoly quantity and charging the monopoly price.
● But in reality, Airbus and boeing don’t form a cartel due to both of them want to take
over the airplane manufacturing industry.

Soon enough, the size of an Oligopoly will increase it manufacturer example:

Comac(China), Mitsubishi(japan), UAC(russia). Therefore All manufacturers weighs the
following two effects:
● The output effect: The price is above marginal cost
● The price effect: the price will get lower when production is raising which will
increase the total amount sold.
17.2 The economics of Cooperation

● The best result is monopoly outcome.

● It requires cooperation.
● It is necessary to have a look to game theory.
● Prisoner’s dilemma. It shows that coop is difficult
● Even when in mutual beneficial it is a result that is
not possible to reach.
 17.2a The Prisoner’s dilemma
● Two criminals capture by the police.
● They likely committed a robbery but there not
enough evidence.
● They split them in different rooms.
● If both confess the crime you will have both 8
years.
● They are criminals and just care about
themselves.
● Police have enough evidence to convict them
each would speed 1 years in jail.
● Police said that they already can be 1 years in
jail or can confess, and he will be free his
partner should be 20 years in jail.
 17.2b Oligopoly as a Prisoner’s Dilemma

● The companies would like to reach the

monopolist outcome.
● Both producers agree to keep 30 gallons and
profit will be the maximum.
● Even the agreement they have the possibility
to ignore it.
 17.2c Other Example of the prisoner’s Dilemma

● Decision between USA and Soviet Union to produce

arms
● Each country prefers to have more arms will give more
influence on world affairs.
● Each country prefers as well to live in a place with
peace.
● If each company drill one well and each will have half of
the oil. 5 million profit
 17.2d The Prisoner’s Dilemma and the Welfare of Society

● Between participants, lack of cooperation is worse but no for

society.
● In the arms-race, The final outcome is worse for all society.
● The situation of Exxon and Texaco is worse for society.
● In the case monopoly results is not reached that is better for
society.
 17.2e Why People Sometimes cooperate

● Sometimes the problem of deviation can be solved,

when the games is played several times.
● The game of gallons, When play once the outcome
should be the deviation.
● They can enforce agreement. Once one of them
reneges both should produce 30 for ever.
● When cheating, for one week the firm will have 2000
USD instead of 1800 USD.
● The next week both will have 1600 USD.
17.3 Public Policy toward Oligopolies

● Governments can sometimes improve market outcomes.

● Policy makers should try to induce firms in an oligopoly to compete rather than
cooperate.

17.3a Restraint of Trade and Antitrust Laws

● Antitrust laws make it illegal to restrain trade or to monopolize a market:

● The Sherman Antitrust Act of 1890
Elevated agreements among oligopolists from unenforceable contracts to criminal
conspiracies.
● Clayton Act of 1914
- Further strengthened the antitrust laws.
 17.3b Controversies over Antitrust Policy

Most commentators agree that price-fixing agreements among competing firms

should be illegals.

➔ Antitrust policies sometimes may not allow business practices that have potential
positive effects:
● Resale Price Maintenance
● Predatory Pricing
● Tying
● Resale Price Maintenance (Fair Trade)

Occurs when wholesalers require retailers to charge a specific amount, might seem
anticompetitive like an agreement among members of cartel.

● Predatory Pricing

Occurs when a large firm begins to cut the price of its product with the intent of
driving its competitors out of the market. So that it can recapture its monopoly and
raise prices again.

Predatory Pricing is a common claim in antitrust suit and rarely a profitable

business strategy. For a price war to drive out a rival, prices have to be driven below
cost.
● Tying

When a firm offers two or more of its product together at a single price, rather
than separately, and disregard whether the consumer does or does not want the
second item. It is a form of price descrimination.

However this action cannot change market power.

Thus, tying may sometimes allow the firm to increase profit.

 What is prisoner’s dilemma?

● The prisoner's dilemma is a specific type of game in game theory that illustrates why
cooperation may be difficult to maintain for oligopolists even when it is mutually
beneficial.
● A game that shows why two individuals might not cooperate, even if it appears that it
is in their best interests to do so.
 The tit-for-tat strategy
● It is essentially the biblical strategy of
“an eye for an eye, a tooth for a tooth.”
● Purpose: the program that received the
fewest total years in jail. Playing to tie with
the other player.
● To encourage cooperation, players must
penalize each other for not cooperating.
● One misstep ends the cooperation forever.
 The tit-for-tat strategy
● a strategy made up of two moves (Cooperate and Defect)
● this strategy starts out friendly, penalizes unfriendly players, and forgives them if
warranted.
● a player should start by cooperating
● then do whatever the other player did last time.
● You cooperate if the other player cooperated last round, and cheat if the other player
cheated in the previous round.

1 2 3 4 5 6 7 8 9 10 …...

Player A D D D D D C C C D C

Player B C D D D D D C C C D
 Conclusion
● Oligopolists maximize their total profits by forming a cartel and acting like a monopolist.
Yet, if oligopolists make decisions about production levels individually, the result is a
greater quantity and a lower price than under the monopoly outcome.
● The prisoner's dilemma shows that self-interest can prevent people from maintaining
cooperation, even when cooperation is in their mutual interest.
● Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that
reduces competition.
● As a result, policymakers need to be careful when they use the substantial powers of the
antitrust laws to place limits on firm behavior.
 Thank You!

Your attention was greatly appreciated :)

Q&A