KRUGMAN'SMICROECONOMICS for AP*

Oligopoly in Practice

Margaret Ray and David Anderson

Micro:

Econ:

3066

Module

What you will learnin this Module:• The legal constraints of antitrust

policy.

• The factors that limit tacit collusion.

• The causes and effects of price wars, product differentiation, price leadership, and nonprice competition.

• The importance of oligopoly in the real world.

Antitrust Legislation

• Laws including the Sherman Act and the Clayton Act make cartels, collusion, and certain anti-competitive business practices illegal

Factors Limiting Tacit Collusion

• Large numbers• The more firms in the industry, the less likely tacit collusion will be successful

• Complex products and pricing schemes• It is easier to tacitly agree to keep a price high if the product is simple and there are few ways price can be set.

• Differences in interests• If firms have diverse characteristics and interests, it will be more difficult to establish and maintain tacit agreements.

• Bargaining powers of buyers• If the buyers of a product have bargaining power, or they operate in a competitive retail environment, tacit agreements to keep prices high are unlikely to succeed.

• Sca

Product Differentiation and Tacit Collusion

• Product differentiation

• Price leadership

• Non-price competition

How Important is Oligopoly?

• Prevalence in the “real world”

• Difficulty of modeling oligopoly firm behavior