MICROECONOMICS

Class 8. Market Structure 2

RELAXATION AND FOCUSING TECHNIQUE

• Breath awareness technique:

• Few breaths noticing the air coming in through your nostrils and going
out.

• Notice if the air stays on your chest or goes down to your belly.

• Put your attention at the tip of your nose and at your belly button (navel)
and simultaneously notice the air going in and going out.

• Thoughts will cross your mind, let them go and bring your attention back
to the tip of your nose and belly button and notice the air going in and
out.

• The more you practice this technique the easier it becomes to have your mind
empty of thoughts and be able to focus.
OLIGOPOLY
An Oligopoly is a market structure characterized by the fact that only few firms
supply a specific good or service.

Examples:

- Operating systems for computers: apple, windows, unix

- Airplanes production: Boeing, Airbus (duopoly)
- Television channels: in Spain, TVE – Mediaset – Atresmedia
- Some natural resources (Aluminium – CHN, RUS, CAN; copper – CHL, CHN,
USA)
OLIGOPOLY
• The key to understand oligopoly is that firms react to what their
competitors do, and, therefore, whenever a firms makes a choice, it
takes into account the competitors’ reaction.
• This is called strategic behavior

• Strategic behavior also explains why in many occasions it is hard to have

co-operation (among firms, countries…)
• It is represented by a theory called game theory
GAME THEORY
• Strategic behavior means try to make the best possible move, giving what
you expect the others to do
• The prisoner’s dilemma is the most famous example

Bonnie’s Decision

Confess Remain Silent

Bonnie gets 8 years Bonnie gets 20 years

Confess
Clyde gets 8 years Clyde goes free
Clyde’s
Decision Bonnie goes free Bonnie gets 1 year

Remain

Silent
Clyde gets 20 years Clyde gets 1 year
 GAME THEORY
• The Nash Equilibrium: each makes his best move, given what the other
would do.
• The Nash Equilibrium is not what would leave the players’ better off…

Bonnie’s Decision

Nash Equilibrium Confess Remain Silent

Bonnie gets 8 years Bonnie gets 20 years

Confess
Clyde gets 8 years Clyde goes free
Clyde’s
Decision Bonnie goes free Bonnie gets 1 year

Remain

Silent
Clyde gets 20 years Clyde gets 1 year
Best possible
outcome if players
could co-operate
OLIGOPOLY
Imagine a town where only two producers own the supply of water and
decide how much water to supply. Call the two producers Jack and Jill.
Suppose there are no costs for simplicity (MC = 0).

QUANTITY (IN GALLONS) PRICE TOTAL REVENUE (AND TOTAL PROFIT)

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
Monopoly 90 30 2,700
Perfect
equilibrium, 100 20 2,000
competition
Profits are 110 10 1,100
120 0 0
maximized
equilibrium,
P = MC
OLIGOPOLY
Things in oligopoly are different, because oligopolists must take into
account the reaction of their competitor(s) when they decide how much
to produce.

There are two possibilities:

1) Competition among firms

2) Collusion -> firms create a cartel: they fix prices together indirectly
through how much they supply, share the markets, limit the quantity
produced as a whole. Cartels are generally illegal.

Firms act as if they were a single monopolist firm and they

maximize the whole market’s profits. Then, for example, they share the
profits 50-50.
OLIGOPOLY
More commonly (and legally) firms in an oligopoly try to maximize their
profits against the competition generated by the other firms in the market.

- Unlike a monopoly, they have to take into account what their

competitors do when they choose Q and P

- Unlike perfect competition, what each firm does will indeed affect the
decisions of the other firms
PROFIT MAXIMIZATION IN AN
OLIGOPOLY
We continue with our example of the two producers of water (duopoly).

Remember that in an oligopoly, a profit-maximizing firm decides how much

to produce (and the price) taking into account what it expects from the
competitor(s) (strategic behavior).

Example:

-Jack expects Jill to produce 30 gallons.

- At that point, what he faces is residual demand.

-So, the question is: given that Jill will produce 30, what is the
level of output (and corresponding price) that maximizes my
profits?
PROFIT MAXIMIZATION IN AN
OLIGOPOLY
Given that Jill produces 30, how much should Jack produce (no cartel between
Jill and Jack)?

QUANTITY PRICE TR & PROFITS

0 90 0
10 80 800
20 70 1400
30 60 1800
40 50 2000
50 40 2000
60 30 1800
70 20 1400
80 10 800
90 0 0
PROFIT MAXIMIZATION IN AN
OLIGOPOLY
Given that Jill produces 30, how much should Jack produce (no cartel between
Jill and Jack)?
QUANTITY PRICE TR & PROFITS
0 90 0
10 80 800
20 70 1400
30 60 1800
40 50 2000
50 40 2000
60 30 1800
70 20 1400
80 10 800
90 0 0
PROFIT MAXIMIZATION IN AN
OLIGOPOLY
• Total production, given that Jill produces 30, will be in this case 80
gallons.

• The same reasoning could be done by Jill.

• As a result
 In an oligopoly, the total quantity produced is higher than in
a monopoly (when no cartel). Firms maximize their own
profits but total profits are lower than a monopolist’s.

 However, total output is still less than that of a competitive

market and firms obtain profits > 0.

 For the same reason, the equilibrium price in an oligopoly with

no cartel is lower than in the monopoly, but higher than perfect
competition.
PROFIT MAXIMIZATION IN AN
OLIGOPOLY
A situation like this is called a Nash Equilibrium.

A Nash Equilibrium is a situation where each player in a game (or in the

market) chooses his or her best strategy, given the strategy chosen by
other players.

A Nash Equilibrium arises every time, in a situation with conflict of interests,

it is not possible to co-operate (or collude) and therefore everybody acts in
their own interest.

If the players could co-operate, the result would leave them better off
• Prisoner’s Dilemma
RULES OF THE GAME

• Why some countries have more monopolies and oligopolies than others?

• Why some countries have higher entrepreneurship start up than others?

• How are ”the rules of the game” defined?

• What main economic systems are you familiar with? How are goods and
services exchanged in each of them? What is the main goal of each of
them?
RULES OF THE GAME

• Why some countries have more monopolies and oligopolies than others?
• Because of the “rules of the game” the legal system favors it. It can
be more Inclusive or more Extractive.

• Why some countries have higher entrepreneurship start up than

others?
• Because of the “rules of the game” the legal system favors it.

• How are ”the rules of the game” defined?

• Social norms: culture, tradition, religion (history is very
important to understand current economic situations)
• Legal norms: common law, civil law, religious law, mix of laws
(they were created based on each region’s culture and
circumstances)
Background Recent Economic
Systems
MONOPOLIES, OLIGOPOLIES, PEOPLE
Which are the 14 OPEC countries?
MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE

Which is the dominant search engine in:

US

Russia

China

Japan
MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE

Which is the dominant operating systems in:

US

Russia

China

France
MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE

Which companies are the dominant food producers?

MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE
MONOPOLIES, OLIGOPOLIES, PEOPLE