1. Consider the 3 market structures we have learned so far

2. What do they seem to depend on?

Mankiw Ch17

Perfect Competition

Monopolistic

CompetitionOligopoly Monopoly

Oligopoly Features: Few large firms Very similar products Interdependent Firms compete on products, not price Very difficult to start new firm Very difficult to close down firm Not fully informed consumers

Measuring Market Concentration Concentration ratio: the percentage of

the market’s total output supplied by its four largest firms.

The higher the concentration ratio, the less competition.

Concentration Ratios in Selected U.S. Industries Industry Concentration ratio

Video game consoles 100%

Tennis balls 100%

Credit cards 99%

Batteries 94%

Soft drinks 93%

Web search engines 92%

Breakfast cereal 92%

Cigarettes 89%

Greeting cards 88%

Beer 85%

Cell phone service 82%

Autos 79%

OLIGOPOLY6

The Size of the Oligopoly

As the number of firms in the market increases, the price effect becomes smaller the oligopoly looks more and more like a

competitive market P approaches MC the market quantity approaches the socially

efficient quantity

Another benefit of international trade: Trade increases the number of firms

competing, increases Q, brings P closer to marginal cost

Automakers as example

Another benefit of international trade: Trade increases the number of firms

competing, increases Q, brings P closer to marginal cost

Automakers as example

Special type of Oligopoly Duopoly Oligopoly with only 2 firms Comic books Coke vs. Pepsi

King of the Hill

Graph before collusion Propane market structure?

Graph after collusion show profits, don’t move ATC

If firms discuss and agreed on new prices…

This is called collusion. And you formed a cartel.

Collusion = setting of prices by rival firmsCartel = groups of rival firms that try to fix

prices to increase profits

**Drug cartels – don’t compete on priceIn the United States, it is illegal

Mankiw Pages 369

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