Oligopoly

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OLIGOPOLY

INTRODUCTION

Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels that would prevail under competition.

The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual interest. The logic of the prisoners’ dilemma applies in many situations including arms races, advertising, common-resource problems, and oligopolies.

Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. The application of these laws can be controversial, because some behavior that may seem to reduce competition may in fact have legitimate business purposes.
Between Monopoly and Perfect Competition

A. The typical firm has some market power, but its market power is not as great as that described by monopoly.

B. Firms in imperfect competition lie somewhere between the competitive model and the monopoly model.

C. Definition of oligopoly: a market structure in which only a few sellers offer similar or identical products.

1. Economists measure a market’s domination by a small number of firms with a statistic called a concentration ratio.

2. The concentration ratio is the percentage of total output in the market supplied by the four largest firms.

3. In the U.S. economy, most industries have a four-firm concentration ratio under 50%.

D. Definition of monopolistic competition: a market structure in which many firms sell products that are similar but not identical.

E. Figure 1 summarizes the four types of market structure. Note that it is the number of firms and the type

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