Game Theory and Oligopoly Fall

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Econ 101: Principles of Microeconomics
Chapter 15 - Oligopoly

Fall 2010

Herriges (ISU)

Ch. 15 Oligopoly

Fall 2010

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Outline

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Understanding Oligopolies

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Game Theory The Prisoner’s Dilemma Overcoming the Prisoner’s Dilemma

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Antitrust Policy

Herriges (ISU)

Ch. 15 Oligopoly

Fall 2010

2 / 25

The Oligopoly
Monopolies are quiet rare, in part due to regulatory eﬀorts to discourage them. However, there are many markets that are dominated by a relatively few ﬁrms, known as oligopolies. The term oligopoly comes from two Greek words: oligoi meaning “few” and poleein meaning “to sell”. Examples of oligopolies include:
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Airliner Manufacturing: Boeing and Airbus Food
Eﬀorts to model such strategic interactions has led to a whole branch of economics and math known as game theory

Herriges (ISU)

Ch. 15 Oligopoly

Fall 2010

8 / 25

Understanding Oligopolies

The Duopoly
In order to understand some of the possible behaviors in the case of oligopolies, consider the simplest case - the duopoly (i.e., two ﬁrms). Think, for example, of the airliner industry, which is dominated by two ﬁrms (Boeing and Airbus). Suppose that the demand for airliners in any given month is given by
Price (\$mill.) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0
Herriges (ISU)

Quantity Demanded 0 1 2 3 4 5 6 7 8

Total Revenue TR = P × Q 0 3.50 6.00 7.50 8.00 7.50 6.00 3.50 0
Ch. 15 Oligopoly

Marginal Revenue MR = ∆TR/∆Q 3.50 2.50 1.50 0.50 -0.50 -1.50 -2.50 -3.50
Fall 2010 9 / 25

If MC=1.75, how much would a monopoly produce? Q=2

Understanding Oligopolies

The Collusion Outcome
One alternative in the case of a duopoly would be for the two ﬁrms to form a cartel A cartel is an agreement among several producers to obey output restrictions in order to increase their joint proﬁt. Essentially, the cartel acts like a monopolist and simply divides the market among members of the cartel. The most famous example of this is the Organization of Petroleum Exporting Countries (OPEC) OPEC was formed in 1960’s in response to quotas instituted by President