ECON 2010 Lecture Notes - Lecture 28: Monopoly Price, Perfect Competition, Game Theory

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ECON 2010 Full Course Notes

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Oligopoly is when there are few sellers of an identical good. In an oligopoly sellers have some market power. I(cid:374)terdepe(cid:374)de(cid:374)(cid:272)e is (cid:449)he(cid:374) o(cid:374)e fir(cid:373)"s de(cid:272)isio(cid:374) i(cid:373)pa(cid:272)ts the (cid:373)arket pri(cid:272)e for e(cid:448)er(cid:455) fir(cid:373) If oligopolies cooperate with each other they will produce at the most efficient quantity and make the most profit. Monopoly quantity is the most efficient quantity an oligopoly can produce at. Cartels are when two or more oligopolies collude. Game theory predicts how interdependent decision makers will behave. Duopolies are when there are exactly two sellers of an identical good. The t(cid:449)o fir(cid:373)s i(cid:374) a duopol(cid:455) (cid:272)a(cid:374) (cid:272)ollude a(cid:374)d for(cid:373) a (cid:272)artel to (cid:373)a(cid:454)i(cid:373)ize profits (cid:271)ut that"s illegal. Other tha(cid:374) (cid:272)ollusio(cid:374)"s illegalit(cid:455) fir(cid:373)s i(cid:374) a duopoly do not collude because one firm is likely to cheat the agreement to make even more profit. Cheating hurts the firm that does not cheat significantly so firms do not want to take that chance.

Related Questions

a. The firms in an oligopoly would find it advantageous to form a cartel. What is a cartel? What price would the cartel charge? That is, would they charge and price closer to what a monopolist would charge, or closer to the price that would prevail in a competitive market? Why?

b. Cartels are difficult to form and maintain. Why is this? Even if they are legal (they are not in the U.S.), what would make it difficult for the firms to cooperate? Under what circumstances is the cartel more likely to be successful? give at least two difficulties.

C. Briefly describe at least one strategy a firm could use to encourage cooperation among the other firm(s) in their cartel.

d. Can oligopolies be efficient? Why or why not?

beigeyak76

1) A natural monopoly exists when:

a. A few firms collude to make one large firm

b. Firms enter the industry as a result of profit incentives

c. Economies of scale provide large cost advantages to having one firm produce the industry's output

d. Firms naturally maximize regardless of market structure

2) A(n) ____ is a single firm with ___, whereas a(n) ___ implies an industry with ____ firm(s) and ____ .

a. Monopoly; barriers to entry; oligopoly; few; no barriers to entry

b. Oligopoly; no barriers to entry; monopoly; many; easy entry and exit

c. Monopoly; barriers to entry; monopolistic competition; many; easy entry and exit

d. Monopolistic competitor; barriers to entry; monopoly; one; barriers to entry

3) In monopolistic competition:

a. Each firm produces a product identical to that of every other firm in the industry

b. Firms are aware of their strategic interdependence

c. Firms earn large economic profits in the long run

d. Firms earn zero economic profits in the long run

4) A monopolistically competitive industry, such as corn snack chips, and a perfectly competitive industry, like wheat farming, are alike in that:

a. There are many firms in each industry

b. Firms in both types of industries produce similar but not identical products

c. Barriers to entry in both industries are large

d. Firms in both types of industries produce identical products

byzantiumfish483

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

ECON 2010 Lecture Notes - Lecture 28: Monopoly Price, Perfect Competition, Game Theory

ECON 2010 Full Course Notes

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