In this chapter we discuss the types of imperfect competition and examine a particular type called oligopoly. Our goal in this chapter is to see how this interdependence shapes the firms’ behavior and what problems it raises for public policy. | Oligopoly Chapter 16 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Imperfect Competition Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers. 7 Types of Imperfectly Competitive Markets Oligopoly Only a few sellers, each offering a similar or identical product to the others. Monopolistic Competition Many firms selling products that are similar but not identical. 8 The Four Types of Market Structure Monopoly Oligopoly Monopolistic Competition Perfect Competition Tap water Cable TV Tennis balls Crude oil Novels Movies Wheat Milk Number of Firms? Type of Products? Many firms One firm Few firms Differentiated products Identical products Characteristics of an Oligopoly Market Few sellers offering similar or | Oligopoly Chapter 16 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. Imperfect Competition Imperfect competition includes industries in which firms have competitors but do not face so much competition that they are price takers. 7 Types of Imperfectly Competitive Markets Oligopoly Only a few sellers, each offering a similar or identical product to the others. Monopolistic Competition Many firms selling products that are similar but not identical. 8 The Four Types of Market Structure Monopoly Oligopoly Monopolistic Competition Perfect Competition Tap water Cable TV Tennis balls Crude oil Novels Movies Wheat Milk Number of Firms? Type of Products? Many firms One firm Few firms Differentiated products Identical products Characteristics of an Oligopoly Market Few sellers offering similar or identical products Interdependent firms Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost There is a tension between cooperation and self-interest. 10 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 and Quantity Supplied The price of water in a perfectly competitive market would be driven to where the marginal cost is zero: P = MC = $0 Q = 120 gallons The price and quantity in a monopoly market would be where total profit is maximized: P = $60 Q = 60 gallons A Duopoly Example: Price and Quantity Supplied The socially efficient 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 .
