Oligopoly Market Structure

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Oligopoly Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. • Under perfect competition, monopoly, and monopolistic competition, a seller faces a well defined demand curve for its output, and should choose the quantity where MR=MC. The seller does not worry about how other sellers will react, because either the seller is negligibly small, or already a monopoly. Under oligopoly, a seller is big enough to affect the market. You must respond to your rivals’ choices, but your rivals are responding to your choices.

In oligopoly markets, there is a tension between cooperation and self-interest. If all the
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Jack does not care that Jill’s output is sold at a lower price.

The price effect is smaller for duopoly than monopoly, and the quantity effect favors more output whenever price is above marginal cost. Therefore, the Nash equilibrium price will be closer to marginal cost than the monopoly price. The more firms in the oligopoly, the smaller the price effect will be, and the lower the Nash equilibrium price. When the number of firms approaches infinity, the price effect approaches zero. Therefore, each seller will increase output whenever the price is above marginal cost. In the limit, we have the perfectly competitive price, and the socially efficient quantity.

A Brief Introduction to Game Theory Game Theory can be used to study oligopoly games other than the “quantity competition” game played by Jack and Jill, as well as arms races, voting games, bargaining games, and so on. A Game is defined to be: • A set of players • A set of possible strategies for each player, • A payoff or outcome function that assigns payoffs to each player for each combination of strategies (one strategy for each player).

The Prisoners’ Dilemma Bonnie and Clyde are caught with illegal weapons (1 year sentence), but are suspected of bank robbery. Interrogated in separate rooms. If both remain silent, one year each. If one confesses, and testifies against the other, he or she will get immunity and the other gets 20 years. If both confess, their testimony is
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