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Oligopoly

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by

Sung Soo Lim

on 25 November 2012

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Transcript of Oligopoly

Oligopoly Characteristics Game Theory Game Theory Oligopoly Game Only a few sellers
Offer similar or identical products
Interdependent Nash Equilibrium If they collude,
they will end up with $1800.
However,
since each has an incentive to cheat,
they will end up with $1600,
which is the only Nash Equilibrium. Prices are usually lower than in a monopoly, but higher than it would be
in a competitive market. Examples -Four music companies control 80% of the market - Universal Music Group, Sony Music Entertainment, Warner Music Group and EMI Group
-Four breakfast cereal manufacturers - Kellogg, General Mills, Post and Quaker
-Six movie studios receive 90% of American film revenues.
-Four wireless providers (AT&T Mobility, Verizon Wireless, T-Mobile, Sprint Nextel) control 89% of the cellular telephone service market Duopoly Oligopoly with only two members Boeing and Airbus For a Perfectly Competitive Firm Price = Marginal Cost
Quantity = efficient For a Monopoly Price > Marginal Cost
Quantity > effcient Collusion Agreement among firms in a market
- Quantities to produce
- Prices to charge Cartel Group of firms acting in unison Economic actors interacting with one another Each choose their best strategy Given the strategies that all the other actors have chosen Two men are arrested, but the police do not have enough information for a conviction. The police separate the two men, and offer both the same deal If one testifies against his partner, and the other remains silent, the betrayer goes free and the one that remains silent gets a 20-year sentence. If both remain silent, both are sentenced to only one year in jail on a minor charge. If each 'rats out' the other, each receives a eight-year sentence. What should they do Prisoner's Dilemma Economics of Cooperation People sometimes cooperate -repeat the game
-Agree on penalties if one cheats
-Both have incentive to cooperate
-As long as the players care enough about future profit, they will choose to forgo the one time gain from defection. Policy makers Try to induce firms in an oligopoly to compete rather than to cooperate
Move the allocation of resources to closer to social optimum Examples -An attempt by Major League Baseball owners to restrict players' salaries in the mid-1980s.
-The sharing of potential contract terms by NBA free agents in an effort to help a targeted franchise circumvent the salary cap
-Price fixing within food manufacturers providing cafeteria food to schools and the military in 1993.
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