10 Oligopoly
10.0 a comparison of market structures
Note: This is not part of the textbook or class. This is simply a review of the four market structures.
Review Activities
Directions: Arrange the four market structures on the following spectrum.
Directions: Arrange the four market structures on the following flowchart.
Directions: Complete the following table. Determine the number of firms in each market structure (many, few, one), the types of products offered in each market structure (differentiated products, identical products, either, or only one product is available in the market), the barriers to entry for each market structure (none, moderate, high), how much price control each firm has for each market structure (none, some, considerable), and the concentration ratio in each market structure (0, low, high, 100).
Problems
There are no problems in this section.
External Resources
There are no external resources for this section.
10.1 Theory of the oligopoly
Review Activities
Problems
No problems in this section.
External Resources
Khan Academy: Oligopolies and Monopolistic Competition (Note: This video also appears in chapter 9.)
Khan Academy: Oligopolies, Duopolies, Collusion, and Cartels
10.2 Game theory
Review Activities
Problems
Problem 10.2.1: Suppose that there are two companies producing nuclear-powered vehicles: Oppenheimer Group (an American company) and Fermi, Inc.(an Italian company.) Due to the fact that they explode in any sort of collision, they are not profitable. The profits of each company depend on both their sales along with the sales of the other company. If neither company produces a nuclear vehicle, neither company will earn a profit. If both companies produce nuclear cars, then both manufacturers will each lose $300 million. Finally, if only one manufacturer produces the nuclear car, they will lose $150 million while the other company will not earn anything.
- Draw the game table. Under these conditions, what is the dominant strategy for each company? Will nuclear cars be manufactured?
- Now suppose that both the American government offers the Oppenheimer Group a $350 million subsidy if they continue to manufacture nuclear cars. Draw the new table. How will this impact each company’s decision?
- Finally, suppose that the Italian government offers Fermi, Inc. $400 million subsidy if they manufacture nuclear cars. Draw the new table. How will this impact each company’s decision? Is the outcome efficient? Note: The US government is still offering the $350 million subsidy to the Oppenheimer Group.
Solutions: For the game tables, see the video. In the first part, neither firm will produce. In the second part, only the Oppenheimer Group will produce. In the third part, both firms will produce, but this is inefficient since production is not profitable.
Problem 10.2.2: Determine the dominant strategy and the Nash Equilibrium, if they exist.
| (A,B) | B – Turn Left | B – Turn Right |
| A – Turn Left | (+10,+20) | (+0,+10) |
| A – Turn Right | (+50,+0) | (+30,+30) |
Solutions: DS=(A-Right,B-Right), NE=(A-Right,Right)
Problem 10.2.3: Determine the dominant strategy and the Nash Equilibrium, if they exist.
| (A,B) | B – Up | B – Down |
| A – Up | (+0,+0) | (+50,-30) |
| A – Down | (-30,+50) | (+100,+100) |
Solutions: DS=No Dominant Strategy; NE=(Up, Up) and (Down, Down)
Problem 10.2.4: Determine the dominant strategy and the Nash Equilibrium, if they exist.
| (A,B) | B – Honest | B – Cheat |
| A – Honest | (+5,+0) | (-5,+30) |
| A – Cheat | (-10,+5) | (-20,-30) |
Answer: DS=(A,B)=(Honest, Cheat); NE=(A,B)=(Honest, Cheat)
External Resources
10.3 cartels and collusion
Review Activities
Problems
Problem 10.3.1: Consider two large firms, Alpha Inc. and the Beta Group, that make-up almost all of the sales in a certain industry. If they both set their price high, they will earn a higher profit. If they both set the price low, they will earn a lower profit. If one firm sets the price high and the other firm sets the price low, the price that sets the price high will lose a significant amount of business. The undercutting firm will absorb that profit. The exact profits are shown below.
| (A,B) | B – High Price | B – Low Price |
| A – High Price | ($150,$150) | (-$20,$180) |
| A – Low Price | ($180,-$20) | ($40,40) |
- If the two firms collude with each other and can fully trust each other, what action should each firm take?
- In class, we mentioned that cartels eventually fail. Using this example, explain what will likely happen eventually.
- What is the dominant strategy for this game? That is, what is the likely long-term outcome for this game?
Solutions: Firms will both sell at high price; one firm will cheat and sell at low price; both firms will sell at low price.
External Resources
No external resources for this section.
