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1、Markets With Only a Few Sellers,Because of the few sellers, the key feature of oligopoly is the tension between cooperation and self-interest.,Characteristics of an Oligopoly Market,1,Few sellers offering similar or identical products 2,Interdependent firms 3,Best off cooperating and acting like a m
2、onopolist by producing a small quantity of output and charging a price above marginal cost,A Duopoly Example,A duopoly is an oligopoly with only two members. It is the simplest type of oligopoly.,A Duopoly Example: Demand Schedule for Water,A Duopoly Example: Price andQuantity Supplied,1,The price o
3、f water in a perfectly competitive market would be driven to where the marginal cost is zero: P = MC = $0 Q = 120 gallons 2,The price and quantity in a monopoly market would be where total profit is maximized: P = $60 Q = 60 gallons,A Duopoly Example: Price andQuantity Supplied,The socially efficien
4、t quantity of water is 120 gallons, but a monopolist would produce only 60 gallons of water. So what outcome then could be expected from duopolists?,Competition, Monopolies, and Cartels,The duopolists may agree on a monopoly outcome. Collusion The two firms may agree on the quantity to produce and t
5、he price to charge. Cartel The two firms may join together and act in unison.,Competition, Monopolies, and Cartels,Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists as a matter of pub
6、lic policy.,The Equilibrium for an Oligopoly,When firms in an oligopoly individually choose production to maximize profit, they produce quantity of output greater than the level produced by monopoly and less than the level produced by competition.,A Duopoly Example: Demand Schedule for Water,Summary
7、 of Equilibrium for an Oligopoly,Possible outcome if oligopoly firms pursue their own self-interests: Joint output is greater than the monopoly quantity but less than the competitive industry quantity. Market prices are lower than monopoly price but greater than competitive price. Total profits are
8、less than the monopoly profit.,The Equilibrium for an Oligopoly,The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost).,How the Size of an Oligopoly Affects the Market Outcome,How increasing the number of sellers affects the price and
9、quantity: The output effect: Because price is above marginal cost, selling more at the going price raises profits. The price effect: Raising production lowers the price and the profit per unit on all units sold.,How the Size of an Oligopoly Affects the Market Outcome,As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level.,