Oligopoly

• In many oligopolies. . competition is through advertising and product differentiation (car) • In some other oligopolies. each with large capacity relative to total market demand.Oligopoly Features • Small number of sellers. standardised products (Steel) • Barriers to entry in oligopoly either due to economies of scale or due to strong product name recognition.

Collusion/collusive oligopoly • When there are small no of firms. . it is collusion • Firms jointly set their prices and divide the market among themselves. they have a choice between co-operative or noncooperative behaviour • Non-co-operation when there is no explicit or implicit agreement • But when firms under oligopoly actively cooperate.

Game theory .

• GT is quite useful for understanding the behaviour of oligopolists.Game theory • The oligopolies can reach the monopoly outcome but they need to co-operate. . • Game theory is a study of how people behave in the strategic situations. • Such a situation is the one in which each player must consider how others will react.

• If both talk. he gets minimum while other gets maximum punishment. both get moderate punishment .Prisoners’ Dilemma • PD is two person-non-zero-sum. one player’s gain is other’s loss • In non-z-g. • Two criminals captured by the police • Committed minor crime of carrying an unregistered gun • So one year jail • Also suspecting bank-robbery for which no evidence • If one confesses. both may gain or lose depending on the actions each chooses to take. Here opponents are not allowed to share information with each other. non-cooperative game with a dominant stategy. • In zero-sum game.

The Prisoners’ Dilemma Suspect 1 Confess 8 years Remain Silent 20 years free Confess 8 years Suspect 2 Remain Silent free 20 years Bonnie gets 1 year John gets 1 year .

• Lack of co-operation may not always be bad for a society as a whole • PD is a dilemma for the prisoners but not for the police as they can convict more criminals if there is no co-operation • Invisible hand in the market is successful only when the firms do not co-operate. .Conclusion • Thus PD describes how co-operation is difficult to maintain even though it would make both the players better off.

Market Failures .

pages 567-571 Pindyck-rubinfeld-Microeconomics-7th ed. • This is called asymmetric information.) • In most of the issues discussed so far. . • But in reality. we have assumed that the consumers and producers have complete knowledge of the products bought and sold. some parties in the market know more than others.Asymmetric information(ref.

Examples • In a market for the used cars the buyer knows less about the quality of car as compared to the seller • In case of an insurance company. different workers have different productivities and it is difficult for the employer to know about it .• AS is a market situation in which the buyers and sellers have different information while making transactions. the customer is better aware of the probability of getting ill than the insurance company • In the labour market.

• Two types of used cars for sell – high quality and bad quality • Price will be determined on the basis of average quality of cars. even though he is buying high quality car and not a lemon. All the sellers will claim that their cars are of good quality. Eg cars. . • Market for lemons (low quality or defective goods). The buyer is not properly informed and hence ready to pay not more than the average price.Asymmetric Information (AI) • AI leads to failure of market which means the markets can not function in the most efficient way.

• This process will continue till only lemons are remaining in the market. • Some more good cars will be out of the market. low quality goods can drive high quality goods out of the market. the owners of a good car will not get the price equal to their worth and hence they will tend to leave the market.• As a result. • The lemon problem implies that with AI. • This is adverse selection . This will reduce the supply of good quality used cars • Average quality of cars and hence their price will further fall.

Some will prefer low quality cars because of the low cost while others will be willing to pay more for the good quality cars. • Unfortunately consumers can not easily determine the quality until they buy the one.Implications of AI • AI results in market failure. consumer would be able to choose between lowquality and high-quality cars. In ideal market. • Market failure arises because there are owners of high quality cars who value their cars higher than the potential buyers of high quality cars. .

• For most of the goods provided privately. Eg use of highway. public television • Most of the goods are rival in consumption. When one buys it.Public Goods (Pages 557-561) • Public goods have two characteristics • Non-rival – A good is non-rival when for any given level of production. lighthouse. other can not have it. MC of producing goods is positive. the marginal cost of providing it to an additional consumer is zero. . • But for some goods. additional consumers do not add cost.

TV signals. National defence • Some goods are exclusive but non-rivals. • Non-exclusive – people can not be excluded from consuming it. provide benefits to the people at zero marginal cost and no one can be excluded from enjoying them. MC may be zero once a signal is broadcast. So difficult to charge the people.. But the signals may be made exclusive by charging for the codes to unscramble them.Contd. • Public goods which are both non-rival and nonexclusive. .

But when many are involved.Public goods and market failure • Some services can not be provided to exclusively to a few. . Mosquito abatement programme. people have no incentive to pay. though it is useful for them. so. subsidised or must be provided by governments if it is to be produced efficiently. As a result. all of them might agree to share costs. • The presence of free riders makes it difficult to provide goods efficiently. People can act as free riders who enjoy the good without paying for it. • Public good. If a few people were involved. voluntary private arrangements are ineffective.

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