Lecture Principles of Microeconomics - Chapter 11: Challenge to market effectiveness 2: Oligopolies. After reading this chapter, you should be able to answer the following questions: What is oligopoly? What is the Prisoners’ Dilemma? How do oligopolistic firms find themselves in the pricing Prisoners’ Dilemma? How do oligopolists escape the pricing Prisoners’ Dilemma? How do colluding oligopolists harm a society? Why do oligopolists have incentives to innovate? How do antitrust laws affect the society? | Chapter 11 Challenge To Market Effectiveness 2: Oligopolies McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is oligopoly? What is the Prisoners’ Dilemma? How do oligopolistic firms find themselves in the pricing Prisoners’ Dilemma? How do oligopolists escape the pricing Prisoners’ Dilemma? How do colluding oligopolists harm a society? Why do oligopolists have incentives to innovate? How do antitrust laws affect the society? 11- Oligopoly Oligopolistic markets are in between a monopoly (where there is just one firm) and perfect competition (where there are a large number of firms). Industry % of . market controlled by four largest firms in the industry Breweries Cigarette manufacturing Electric lamp bulb and part manufacturing Light truck and utility vehicle manufacturing Guided missile and space vehicle manufacturing 11- In The Quest Of An Oligopoly Antitrust laws prevent . | Chapter 11 Challenge To Market Effectiveness 2: Oligopolies McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is oligopoly? What is the Prisoners’ Dilemma? How do oligopolistic firms find themselves in the pricing Prisoners’ Dilemma? How do oligopolists escape the pricing Prisoners’ Dilemma? How do colluding oligopolists harm a society? Why do oligopolists have incentives to innovate? How do antitrust laws affect the society? 11- Oligopoly Oligopolistic markets are in between a monopoly (where there is just one firm) and perfect competition (where there are a large number of firms). Industry % of . market controlled by four largest firms in the industry Breweries Cigarette manufacturing Electric lamp bulb and part manufacturing Light truck and utility vehicle manufacturing Guided missile and space vehicle manufacturing 11- In The Quest Of An Oligopoly Antitrust laws prevent firms colluding on price as well as monopolies from forming. An implicit agreement to raise prices: sending a clear but legal signal through consecutive change of price. The challenge of maintaining high prices: each firm has an incentive to cheat by undercutting the implicit agreement. The challenge of international competition. The attempts of product differentiation and complicated pricing. Incompatibility and lock-in. 11- Oligopoly Economists are not sure when oligopolistic firms will compete and when they will cooperate. There is no reliable theory that tells when oligopolists will succeed cooperation. Prisoners’ Dilemma refers to forces that thwart oligopolists’ efforts at cooperation. 11- Prisoners’ Dilemma Two criminals are arrested. The only way to know they’re serious is to establish at least one of them has confessed. By separating them, the police create incentives for the prisoners to turn on each other. 11- Prisoners’ Dilemma Stay Silent Ben Confess
