ECO101H1 Lecture 20: Oligopoly and Monopolistic Competition Cont.
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ECO101H1 Full Course Notes
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Oligopolist: if collude to form cartel (illegal), industry may earn monopolistic profits, if one firm has mr > mc, may cheat (by increasing output) and cartel may break down. Point may be made using prisoner"s dilemma (game theory) Duopolists form cartel and agree to divide market output (hence profits) 50:50. Payoff matrix: if each produces one-half of monopoly output. Each has profit of 20: if each produces two-thirds of monopoly output ( cheats ) Each has profit of 17: if one produces one-half of monopoly output and one produces two-thirds of monopoly output. Strategies: produce one-half monopoly output, produce two-thirds monopoly output. Outcome: a and b each produce monopoly, cartel breaks down, in repeat game, punishment strategies may lead to more co-operation. Each firm is optimizing, given the strategy of the other firm. Therefore, neither firm has an incentive to change its strategy.