Oligopoly I

OLIGOPOLIES
These are markets where there's more than
one market player, yet where each firm is large
enough to actually affect the price. So an
oligopoly market is where there'll be a small number
of firms in the market with substantial
barriers to entry from additional firms. An oligopoly
market where there's a small number of firms with
enough barriers to entry that additional firms don't
enter.
So the classic example of an oligopoly industry is
the auto industry. Here's a market with asmall
number of dominant players. There's been some
entry and exit over time, obviously, but it moves
pretty slowly. By and large it's a market where
there's very limited entry.
Types Of Oligopolies

1. Pure or Perfect Oligopoly: If the firms

produce homogeneous products, then it is
called pure or perfect oligopoly. Though, it
is rare to find pure oligopoly situation, yet,
cement, steel, aluminum and chemicals
producing industries approach pure
oligopoly.
 2. Imperfect or Differentiated Oligopoly: If
the firms produce differentiated products,
then it is called differentiated or imperfect
oligopoly.For example, passenger cars,
cigarettes or soft drinks. The goods produced
by different firms have their own
distinguishing characteristics, yet all of them
are close substitutes of each other.
 3. Collusive Oligopoly: If the firms cooperate with
each other in determining price or output or
both, it is called collusive oligopoly or cooperative
oligopoly.In other words, the firms in a collusive
oligopoly combines to avoid the competition
among themselves regarding the price and
output of the industry. For example,
OPEC(Organization for petroleum exporting
countries) serves the example for collusive
oligopolies.
4. Non-collusive Oligopoly: If firms in an
oligopoly market compete with each other, it
is called a non-collusive or non- cooperative
oligopoly.The firms in non- collusive
oligopoly tries to gain maximum share of the
market by developing policies and strategies
to outperform or beat their rivals.
5.Open oligopoly: An open oligopoly
provides full freedom to new firms to enter
into industry.In the situation of open
oligopoly there is no restriction of any kind
for the desiring firm to enter into the
market.
 6.Closed oligopoly: A closed oligopoly refers to
that market structure where only few firms
control the market and new firms are not allowed
to enter industry. Barriers are set to prevent the
entry of new firms into the industry. For example,
patents,licences,requirement of large
capital,control over crucial raw materials are
some of the reasons which prevent new firms
from entering into industry.
Game Theory

Game theory is the study of how people behave in

strategic situations. By 'strategic' we mean a
situation in which each person, when deciding
what actions to take, must consider how others
might respond to that action.
Game theory is a tool of economics that was
not really used early in economics but has come to
dominate theoretical economics over the past 30 or 40
years. And basically the way that game theory works is to
think, literally, of oligopolistic firms as engaging in a game.
So when you play, don't want to say play Monopoly, that's
confusing terms. When you play Sorry! or whatever with
someone, or play some online game withsomeone, you're
competing to win. You're behaving non-cooperatively.
You're competing to win.
Economists use 'Game Theory' as a tool to
analyze economic competition, economic
phenomena such as bargaining, mechanism
design, auctions, voting theory; experimental
economics, political economy, behavioral
economics etc. Game theory is applied for
determining different strategies in the business
world.
Nash Equilibrium

The movie and book A Beautiful Mind, and that's

called the Nash Equilibrium. A Nash equilibrium is the
point at which no firm wants to change its strategy
given what the other firms are doing.
A Nash equilibrium is the point where no firm wants
to change its strategy given what the other firms are
doing.
John Nash
- He was a famous, actually mathematician. We use his
tools in economics, but he was a mathematician.
Developed these incredible theories, and then developed
schizophrenia, went crazy. But not
before he developed some of the most important
concepts in both mathematics and
economics.
The prisoner's dilemma

The prisoner's dilemma the title comes from the old

way they used to make police movies.
Where the idea is you catch two guys at a crime. You
can't put them away unless one of them
fesses up.
The prisoner's dilemma presents a situation where
two parties, separated and unable to
communicate, must each choose between co-
operating with the other or not. The highest
reward for each party occurs when both parties
choose to co-operate.
Cournot equilibrium
The Cournot model of oligopoly assumes that rival
firms produce a homogenous product, and each
attempts to maximize profits by choosing how much
to produce. All firms choose output (quantity)
simultaneously. The basic Cournot assumption is that
each firm chooses its quantity, taking as given the
quantity of its rivals. The resulting equilibrium is a
Nash equilibrium in quantities, called a Cournot
(Nash) equilibrium.
Cournot competition is an economic model
used to describe an industry structure in
which companies compete on the amount
of output they will produce, which they
decide on independently of each other and
at the same time.
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