OLIGOPOLY MARKETS

Microeconomics Made Easy

by

William Yacovissi

Mansfield University

©William Yacovissi All Rights Reserved

OLIGOPOLY

Oligopolies are markets in which a few large firms divide the market among themselves

Barriers to entry exists so new firms are generally kept out of the market.

OLIGOPOLY

Automobiles provides the classic example of the oligopoly markets.

Each company has a great deal of monopoly power, but are not pure monopolists.

Each company is not a price taker in the sense of the competitive market but must be acutely aware of competitors pricing.

OLIGOPOLY

There is no equilibrium in the oligopoly market as in the other three markets but since chaos doesn’t reign something must establish order.

Game theory has emerged as the most population way to describe oligopoly behavior.

CARTEL BEHAVIOR

One way to view oligopolies is to consider cartels

A cartel is a group of firms that collude together and engage in joint profit maximization

CARTEL BEHAVIOR

But, to make the cartel work, each member must agree to restrict production.

Of course, each member figures out that if they cheat and produce more, while others restrict production they will make greater profit.

CARTEL BEHAVIOR

Cheating, of course, begins to push the market price down as extra production is made available.

Often at this point the cartel breaks down into a full scale price war.

Eventually, cooler heads prevail and the cartel is reestablished

CARTEL BEHAVIOR

The diagram on the next slide illustrates cartel behavior.

The cartel is seen as fluctuating over long periods of time between joint profit maximization at price Pm and joint production of Qm and competitive behavior at price PC and production level Qc

CARTEL BEHAVIOR