ECON 1 Lecture Notes - Lecture 14: Market Power, Predatory Pricing, Nash Equilibrium
29 May 2018
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ECON 1: Chapter 17 Notes
Focus Questions:
• What outcomes are possible under oligopoly?
• Why is it difficult for oligopoly firms to cooperate?
• How are antitrust laws used to foster competition?
Measuring Market Concentration
▪ Concentration ratio: the percentage of the market’s total output supplied by its four largest firms.
▪ The higher the concentration ratio,
the less competition.
▪ This chapter focuses on oligopoly,
a market structure with high concentration ratios.
Oligopoly
▪ Oligopoly: a market structure in which only a few sellers offer similar or identical products.
▪ Strategic behavior in oligopoly:
A firm’s decisions about P or Q can affect other firms and cause them to react. The firm will consider
these reactions when making decisions.
▪ Game theory: the study of how people behave in strategic situations.
Collusion vs. Self-Interest
▪ Both firms would be better off if both stick to the cartel agreement.
▪ But each firm has incentive to renege on the agreement.
▪ Lesson:
It is difficult for oligopoly firms to form cartels and honor their agreements.
The Equilibrium for an Oligopoly
▪ Nash equilibrium: a situation in which economic participants interacting with one another each choose
their best strategy given the strategies that all the others have chosen
▪ Our duopoly example has a Nash equilibrium in which each firm produces Q = 40.
▪ Given that Verizon produces Q = 40,
T-Mobile’s best move is to produce Q = 40.
▪ Given that T-Mobile produces Q = 40,
Verizon’s best move is to produce Q = 40.
A Comparison of Market Outcomes
When firms in an oligopoly individually choose production to maximize profit,
▪ oligopoly Q is greater than monopoly Q but smaller than competitive Q.
▪ oligopoly P is greater than competitive P but less than monopoly P.
The Size of the Oligopoly
▪ As the number of firms in the market increases,
▪ the oligopoly looks more and more like a competitive market
▪ P approaches MC
▪ the market quantity approaches the socially efficient quantity
Game Theory: Thinking Strategically
▪ Each player in the game knows that her payoff depends in part on what the other players do
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Measuring market concentration: concentration ratio: the percentage of the market"s total output supplied by its four largest firms, the higher the concentration ratio, the less competition, this chapter focuses on oligopoly, a market structure with high concentration ratios. Oligopoly: oligopoly: a market structure in which only a few sellers offer similar or identical products, strategic behavior in oligopoly: A firm"s decisions about p or q can affect other firms and cause them to react. The firm will consider these reactions when making decisions: game theory: the study of how people behave in strategic situations. Self-interest: both firms would be better off if both stick to the cartel agreement, but each firm has incentive to renege on the agreement, lesson: It is difficult for oligopoly firms to form cartels and honor their agreements. T-mobile"s best move is to produce q = 40: given that t-mobile produces q = 40, Verizon"s best move is to produce q = 40.
