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AP Micro Economics-Market Structure- Oligopoly

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Jeongho Kim

on 8 March 2015

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Transcript of AP Micro Economics-Market Structure- Oligopoly

vs. Monopolistic Competition
A lot of firms
Few barriers to entry
Different prducts
Each firm is independent
vs. Monopoly
Have one firm
Have barriers
Most output restricted
No competitors
Characteristics of Oligopoly Market
Wednesday, March 4, 2015
Ryan Kim, Sean Park
Smartphone Market
What is Oligopoly?
(Digital History)
a market structure in which an industry is dominated by few firms like supermarkets, petrol, or smartphone companies
Comparison With Other Market Structures
What an Oligopoly Market looks like
Why Does Oligopoly Exist?
Collusion and Cartel
Smartphone Operating system
IOS and Google Android
Computer operating system
Microsoft Windows and Mac OS
Pharmaceutical Industry
Examples of Market Structure of Oligopoly
Only has few firms
Interdependent firms
firms get affected by the changes that are made by other firms
Barriers to entry, less than monopoly
Most common market structure in the world right now
Differentiated markets between small number of firms
Advertisement is important
Have few firms
Have barriers
Output restricted
affected by other firms
vs. Perfect Competition
Infinite numbers of firms
No barriers to entry
No output restriction
Each firm is independent
Demand Curve of Oligopoly Market
In duopoly, the two firms or companies will agree on monopoly outcome
lead to collusion
Collusion- An agreement between two or more parties to dirsrupt the market's equilibrium.
Can be illegal and secretive sometimes
Two or more firms try to change the price of their goods to their advantage
Cartel- a group of firms acting together to increase their profits
The strongest form of collusion
Assumptions made:
Demand is price elastic for price increase
Demand is price inelastic for price cut
Firms: profit maximizers
Game Theory
A and B are both sentenced to jail for 1 year. However, the court has decided to give them a chance to confess! If one of them confesses then that person is set free, however if both confess at the same time then they both spend 5 years in jail.
A and B are both sentenced to jail for 1 year. However, the court has
This gives 4 possible possibilities:
Both confess (5 years)
Neither confess (1 year)
A only confesses (0 years for A, 20 years for B)
B only confesses (0 years for B, 20 years for A)
Two firms in the market
Most basic form of Oligopoly
Can be same or different product
Game Theory (continued)
To confess is a dominant strategy for A
To confess is a dominant strategy for B
Both know that it would be the safest decision to both remain silent and receive only 1 year.
However, it is personally beneficial for A or B if they only confessed and the other didn't.

Game Theory (continued)
Game Theory (continued)
There are two types of games played between firms:
Cooperative Games: firms work together to obtain an objective
Noncooperative Games: firms do not work together. Most commonly found in markets.

Results of these games are classified into three results:
Zero-sum:one firm's losses are balanced by another firm's gains
Negative-sum: all firms as a group has losses
Positive-sum: all firms as a group has gains
This is what Game Theory is.
It is a theory that focuses on listing various possibilities of a situation, and predicting what choices firms will make in response to the situation
Antitrust Laws
Products is controlled by only few producers
Price influences competition
Result of mutual dependency between few companies that own industries that can produce products
Way to secure the few firms that are in control of the market
High barriers such as the need for a capital
Since they are the few firms that can produce the certain product, they need a lot of money
For the few companies to work together and gain profits
economic growth
chores less labor-intensive
save time for business
better personal and
electric trolley
(Digital History)
standards rose
harsh labor conditions
processed foods
more popular
(Digital History)
Makes it illegal to
limit trade
try to monopolize a market for their own benefits
Purpose- to promote and protect competition
to not make one firm much more stronger than the other one
(Digital History)
Strategies in noncooperative games:
Firms always look for the highest benefit. However, firms can be nice and decide on a special equilibrium. This equilibrium is called the Nash Equilibrium.

Nash Equilibrium
: when each firm makes the best decision possible, while matching the decisions of other firms in the game

Strategies in cooperative games:
Firms would negotiate and create a set of standards each firm must follow (Cartel Agreement). However, most of these promises do not last long.

Might not allow:
Resale Price Maintenance (fair trade)
firms charge small businesses (retailers) money
Predatory Price
firms cut down price to drive out their competitors
firms offer products at same price
Full transcript