oadmap: So far, we’ve looked at two polar cases in market structure spectrum: Competition Monopoly Many firms, each one “small” relative to industry; identical product. Only seller of a product with no close substitutes. What’s in between these two extreme cases? gopoly (subject of chpt. 17 -- literally, “few sell A market structure in which only a few sellers offer similar or identical products.
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Roadmap: So far, we’ve looked at two polar cases in market structure spectrum:
Roadmap: So far, we’ve looked at two polar cases in market structure spectrum:. Competition Monopoly. Only seller of a product with no close substitutes. Many firms, each one “small” relative to industry; identical product. - PowerPoint PPT Presentation
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Roadmap: So far, we’ve looked at two polar cases in market structure spectrum:
Competition Monopoly Many firms, each one“small” relative to industry; identical product.
Only seller of a productwith no close substitutes.
What’s in between these two extreme cases?
Oligopoly (subject of chpt. 17 -- literally, “few sellers”):A market structure in which only a few sellers offer similar or identical products.
In oligopoly:
Firms are interdependent:Profits of my firm depend on my decisions (about price, output, etc.), but also on my rivals’ decisions.
Interdependence gives rise to . . .
Strategic behavior:As I decide what decision to make, I consider how my rivals might respond to my decision.
(Note: Features not present in comp. or monopoly.)
TC(q1) = 2 q1 (Fixed costs are zero; marginal cost constant at $2/widget)
Same cost function for firm 2.
The efficient (“competitive”) outcome determined by P = MC.Pc = 2 $/widget.Qc = 120 widgets/day.Each duopolist produces
60 widgets/day.We get the competitive equilibrium when firms act like price takers.Not very likely in this case -- with only 2 firms, they’re likely to recognize their influence on price.
($/widget)
(widgets/day)
14
140
Demand
MC2
120
“Competitive” outcome
Another possibility:
Maybe the 2 duopolists will cooperate -- behave like a single monopolist to maximize joint profit.
Collusion: An agreement among firms in a market about quantities to produce or prices to charge.
Cartel: A group of firms acting in unison.(Remember OPEC?)
The problem for the cartel:Pick joint output (Q) to maximize joint profit (joint ).
Nash, a mathematician, made contributions that areextremely valuable in modern economic theory.
Jointly with two others (John Harsanyi and ReinhardSelten), he was awarded the 1994 Nobel Prize inEconomics “for their pioneering analysis of equilibriain the theory of non-cooperative games.”
http://nobelprize.org/economics/laureates/1994/
Nash was recognized for work that formed the basisfor his Ph.D. dissertation in mathematics atPrinceton.
Nash equilibrium pertains to situations (“games”) in which interdependent economic actors (“players”) face choices among strategies.
Nash equilibrium: A set of strategies, one for each player, such that each player’s strategy is his/her best choice given the strategies chosen by the other players.(http://en.wikipedia.org/wiki/Nash_equilibrium)
For this duopoly case, Nash equilibrium is “between” “monopoly”and “competitive” outcomes.This is true for oligopoly in general.As number of firms increases, Nash gets closer to “competitive.”