Chapter 17: Oligopolies

Main terms to know concerning oligopolies are oligopoly, game theory, collusion,cartel, Nash equilibrium, prisoners’ dilemma, and dominant strategy. Oligopolies are markets where only a few sellers produce a majority of the goods in the market and they offer similar or identical products. Game theory is the study of how people behave in strategic situation, where each firms must act strategically on both how much they produce and how much other firms produce. Collusions are agreements between firms in a market about quantity or price, leading up to a cartel, which is a group of firms acting in unison. The Nash Equilibrium is a situation where economic actors interacting with one another each choose their best strategy given the other strategies the other people have chose. This occurs when none of the actors have any incentive to make a different decision. The prisoners’ dilemma explains the difficulty of maintaining cooperation even when it would be mutually beneficial. It is applicable in multiple situations, including arms races, common-resource competitions, and oligopolies. Dominant strategy is a strategy that is best for a player in a game regardless of other strategies.

Oligopolies maximize their total profits by either creating collusions and acting like a monopolist (leading to a downward sloping demand curve). But, if oligopolies make individual decisions about production, the quantity increases and price decreases. When more firms increase, the quantity and price would become closer to levels that would stay even when there is competition.

Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. These laws can be controversial, since behavior that seems to reduce competition can have underlying reasons for business.

Chapter 16: Monopolistic Competition

Chapter 16 talks about monopolistic competition. Graphically, there is a downward sloping demand curve, and produces quantity where MR=MC, using the demand curve to find price. In the short run, monopolistic competition is similar to a monopoly. However, unlike a monopoly, monopolistic competitive markets have three main characteristics: many firms, different products, and free entry or exit. Free entry occurs when firms are making profits, giving other firms an incentive to join the market. Conversely, free exit occurs when firms are producing at a loss, making firms have less of an incentive to producing the good.

Equilibriums in a monopolistically competitive market differs from that in perfectly competitive market in two ways: each firm in a monopolistically competitive market has excess turkey, and the other is that each firm charges a price above marginal cost. Each firm in a monopolistically competitive market operates on the downward sloping portion of the average total cost curve.

Monopolistic competition also does not have all of the qualities associated with a perfectly competitive market. Since there is a section between the price over marginal cost that is upped, there is a deadweight loss in monopolistically competitive markets. Also unlike perfectly competitive markets, the number of firms and producers can be too large or too small. Policymakers cannot always correct these differences, but they are able to correct some parts of it.

The differences in products also leads to the use of advertising and brand names. Critics of advertising say that firms manipulate consumers’’ tastes and reduce competition. This is also a psychological phenomenon, when people would decide what they want through advertising (especially through physical aesthetic features and the socially accepted norm of what the good should look like). However, on the other hand, people who defend advertising and brand names argue that the firm’s purpose of using them is to inform consumers and compete more vigorously on price and product quality.

Chapter 15: Monopolies

Chapter 15 focuses on monopolies. A monopoly occurs when there is a single firm that supplies a product without close substitutes. Monopolies occur because other firms are unable to join the market, either through monopoly resources (key resource to production owned by a single firm), government regulation (patents or copyrights), or the production process (cost). Monopoly resources are an example of something that can cause a monopoly, but due to the nature of the market (large number of goods with similar substitutes), monopoly resources appear less common.Government can create monopolies as well, either through patents or copyright laws. These two examples offer a way for firms to own a monopoly of a specific good. Even though monopolies are generally portrayed in a negative light, patents and copyright laws provide an incentive for firms and people to create new and better innovations. A natural monopoly arises when a single firm can provide a good to a market with a smaller cost than two or more firms. It rises when there are economies of scale over a period of time.

Profit maximization is determined by the intersection of marginal revenue and cost. Marginal revenue is always less than the demand curve (average revenue). The demand curve determines what the price is. From the intersection, draw a line up to the price curve, and then take the area of the spot on the price curve to the ATC.

The socially efficient quantity of production in the case of a monopoly occurs where the demand curve and marginal-cost intersect. Below the quantity causes the value to consumers to rise over the cost of production, so increasing outputs causes total surplus to increase. On the other hand, a unit above the quantity would raise total surplus through decreasing output. However, monopolistic firms produce less than the socially efficient quantity of output.

Price discrimination is when businesses sell the same good at different prices to different customers. When this is considered perfect, the monopolist knows exactly the willingness to pay of each customer, charging them for that price.