Chapter 16: Oligopolies I. Oligopoly: A market where a very few large sellers dominate an industry with few sellers and they each know how the other will react to changes in prices and quantities. They sell a product that is similar or identical to their competitors. A. Characteristics are……………. 1. Small Number of Firms: The top few firms dominate enough to set prices such as The At- lanta Journal-Constitution, they dominant the newspaper business in the Atlanta Metro area but you also have the Marietta Journal, The Gwinnett Post, The Dekalb Neighbor and scores of smaller news- papers in the metro area. Lockheed, Boeing Aircraft dominant but you have Piper, Cessna, Beechcraft and Mooney Aircraft companies. Another example would be the big 3 auto- makers. 2. Interdependence: There are many examples of industries that react to each others pricing, output and marketing strategies………..the Tobacco companies, processed food, healthcare products, etc. automakers, aircraft companies react to each other always. Copy-Cat Marketing . 3. Oligopolies are in-between the extremes of the no competition monopolies and the dense perfect competition. Oligopolies are imperfect competition . Another imperfect competition can be found with monopolistic competition in a market with many firms that sell similar products but not identical. There are much fewer firms in a Oligopoly markets than monopolistic markets. B. Why Oligopoly Occurs: 1. Economies of Scale: Smaller firms in this situation have a tendency to be inefficient be- cause they do not have a high volume of production to minimize costs as production increases. Their Average Costs continue to rise and they will eventually be bought out by a larger firm or go out of business. 2. Barriers To Entry: These prevent more competition and help a few control an industry. Patents, control of resources, dominant success (Coca Cola vs JL’s Soda Pop) 3. Oligopoly by Merger: The merged firm almost always has a greater ability to enjoy economies of scale, effect pricing, and increase output. Horizontal Merger : 2 steel companies, 2 shoe companies, 2 computer manufacturers. Vertical Merger: when a manufacturer acquires a retailer…..shoemaker/shoe store; Delta buys Boeing; Publix buys Coca-Cola; Sony buys Best Buy. 4. Cartels: A group of firms acting in unison, or collusion. They are illegal in the U. S. but not in most of the world. OPEC for example, which includes Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela. C. Measuring Industry Concentration or Oligopoly: The most popular way to compute industry concentration is to determine the percentage of total sales or production accounted for by the top four or top eight firms in an industry. D. SEE Table 1 This is an example of an oligopoly . 1. U.S. Concentration Ratios: This is a table that shows the percentage oligopoly’s hold in major industry’s. a. Table 2 shows the four-firm domestic concentration ratios for various industries. b. There is no definite way to determine which industries are oligopolies. c. We arbitrarily select 75% as a cut-off for oligopolies in table 2, tobacco, cereals & do- mestic vehicles would make the list….but we could just as well select 60% as the point of reference. 2. Oligopoly, Efficiency, and Resource Allocation: There is no evidence that oligopolies create resource misallocations as monopolies do. This is where they manipulate distribution to artificially inflate price levels. Competition both domestically & internationally limit this possibility and a case could be made for the reverse happening due to economies of scale……..which could mean lower prices.
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Chapter 16: Oligopolies I. Oligopoly: A market where a very few large sellers dominate an industry with few sellers and
they each know how the other will react to changes in prices and quantities. They sell a product that is similar or identical to their competitors.
A. Characteristics are……………. 1. Small Number of Firms: The top few firms dominate enough to set prices such as The At-
lanta Journal-Constitution, they dominant the newspaper business in the Atlanta Metro area but you also have the Marietta Journal, The Gwinnett Post, The Dekalb Neighbor and scores of smaller news-
papers in the metro area. Lockheed, Boeing Aircraft dominant but you have Piper, Cessna, Beechcraft and Mooney Aircraft companies. Another example would be the big 3 auto-makers. 2. Interdependence: There are many examples of industries that react to each others
pricing, output and marketing strategies………..the Tobacco companies, processed food, healthcare products, etc. automakers, aircraft companies react to each other always. Copy-Cat Marketing.
3. Oligopolies are in-between the extremes of the no competition monopolies and the dense perfect competition. Oligopolies are imperfect competition. Another imperfect competition can be found with monopolistic competition in a market with many firms that sell similar products but
not identical. There are much fewer firms in a Oligopoly markets than monopolistic markets.
B. Why Oligopoly Occurs: 1. Economies of Scale: Smaller firms in this situation have a tendency to be inefficient be-cause they do not have a high volume of production to minimize costs as production increases.
Their Average Costs continue to rise and they will eventually be bought out by a larger firm or go out of business.
2. Barriers To Entry: These prevent more competition and help a few control an industry. Patents, control of resources, dominant success (Coca Cola vs JL’s Soda Pop)
3. Oligopoly by Merger: The merged firm almost always has a greater ability to enjoy economies of scale, effect pricing, and increase output. Horizontal Merger: 2 steel companies, 2 shoe companies, 2 computer manufacturers.
Vertical Merger: when a manufacturer acquires a retailer…..shoemaker/shoe store; Delta buys Boeing; Publix buys Coca-Cola; Sony buys Best Buy.
4. Cartels: A group of firms acting in unison, or collusion. They are illegal in the U. S. but not in most of the world. OPEC for example, which includes Algeria, Indonesia, Iran, Iraq, Kuwait, Libya,
Nigeria, Qatar, Saudi Arabia, United Arab Emirates, Venezuela.
C. Measuring Industry Concentration or Oligopoly: The most popular way to compute industry
concentration is to determine the percentage of total sales or production accounted for by the top four or top eight firms in an industry.
D. SEE Table 1 This is an example of an oligopoly. 1. U.S. Concentration Ratios: This is a table that shows the percentage
oligopoly’s hold in major industry’s. a. Table 2 shows the four-firm domestic concentration ratios for various industries.
b. There is no definite way to determine which industries are oligopolies. c. We arbitrarily select 75% as a cut-off for oligopolies in table 2, tobacco, cereals & do-mestic vehicles would make the list….but we could just as well select 60% as the point of reference.
2. Oligopoly, Efficiency, and Resource Allocation: There is no evidence that oligopolies create resource misallocations as monopolies do. This is where they manipulate distribution to
artificially inflate price levels. Competition both domestically & internationally limit this possibility and a case could be made for the reverse happening due to economies of scale……..which could mean lower prices.
Table 2
Firm Annual Sales ($millions)
1 150
2 100
3 80
4 70
5—25 50
Total Firms in 450
the Industry
400
4-Firm Concentration Ration = 450 = 88.9%
} = 400
Industry 4-Firm Share of Value of Total Domestic Shipments Ratios Accounted for by the Top Four Firms (%) Tobacco Products 93%
E. The Nash Equilibrium: When firms choose their best strategy based on the strate-
gies of their competition. Basically, one firm copying another. Home Depot copying Lowes, Wal-Mart copying K-Mart or Pepsi copying Coca Cola. Is this legal?
I. Strategic Behavior And Game Theory: The study of how people behave in strategic
situations. Such as, card games, board games like chess or Monopoly and betting on
sports teams. Corporate or government decisions that have significant impact, taxes,
war, mergers.
A. When there are few firms in an industry, they react to each others price,
product, quality, and distribution policies…..they have an interdependence.
B. Since oligopolistic firms are interdependent, they must have strategies,
usually models to predict how prices and outputs are determined.
C. Economists have developed game theory models to describe firms’ rational
interactions.
II. Some Basic Notions and Characteristics About Game Theory:
A. Example of Cooperative firms: Firms that collude for results…...Publix & Kroger
price fixing, Airlines price-fixing, any two firms price-fixing or engaging in turf
protection...this also called restraint of trade and is illegal.
B. Example of Non Cooperative firms: total open competition with competing firms
having the ability to change prices….due to efficient management or demand.
C. Zero sum games are when any gains by a group are exactly offset by equal
losses by the end of the game.
D. Negative sum games: when players as a group at the end of a game lose, possi-
bly one more than another, and it is possible for one or more players to win.
E. Positive sum games are when both players end up better off, voluntary exchange
are an example.
III. Strategies in Non-Cooperative Games:
A. Decision makers have to devise a strategy, or a rule used to make a choice.
Strategies like Targeting advertising to certain age, income, ethnic, gender
group. One may have more demand for a product than another…..toys for
children, jewelry for women, grits for Southerners, yachts for the rich, or
different clothes, food & music for different groups, etc.
B. The goal is to come up with successful strategies & when they come up with one
that always yields the highest benefit, it is called a dominant strategy. Whatever com-
petitors do, a dominant strategy will yield the most benefit for the player using it.
C. Dominant strategies are rare over the long-run because of competition, Why?
IV. Public Policy Toward Oligopolies: The government recognizes that cooperation between oligopoly firms is harmful
to society and prefers that competition be the policy between firms.
a. Restraint of Trade and the Antitrust Laws:
Chapter 26: Oligopolies
I. Oligopoly: A market where a very few large sellers dominate an industry and they
each know how the other will react to changes in prices and quantities.
A. Characteristics are…………….
1. Small Number of Firms: The top few firms dominate enough to set prices such as The Atlanta Journal-Constitution, they dominant the newspaper business in the
Atlanta Metro area but you also have the Marietta Journal, The Gwinnett Post, The
Dekalb Neighbor and scores of smaller newspapers in the metro area. 2. Interdependence: There are many examples of industries that react to each
others pricing, output and marketing strategies………..the Tobacco companies, processed food, healthcare products, etc. Carmakers, aircraft companies react to each other al-
ways.
B. Why Oligopoly Occurs:
1. Economies of Scale: Smaller firms in this situation have a tendency to be in-
efficient because they do not have a high volume of production to minimize costs as pro-duction increases. Their Average Costs continue to rise and they will eventually be
bought out by a larger firm or go out of business. 2. Barriers To Entry: These prevent more competition and help a few control an
industry. 3. Oligopoly by Merger: The merged firm almost always has a greater ability to
enjoy economies of scale, effect pricing, and increase output.