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 1 / 25 Outline 1 Understanding Oligopolies 2 Game Theory The Prisoner’s Dilemma Overcoming the Prisoner’s Dilemma 3 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: 1 2 3 4 5 6 7 Airliner Manufacturing: Boeing and Airbus Food…show more content…
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
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