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when no one firm has a monopoly but producers nonetheless realize that they can affect market price
two types of imperfect competition
common market structure
an industry with only a small number of producers
a producer in an oligopoly market
an oligopoly consisting of only two firms
each firm produces less/ limited to keep prices higher
what options do the firms have in an oligopoly?
sellers cooperate to raise each others profits
strongest form of collusion
an agreement by several producers to obey output restrictions in order to increase thier jint profits
ignoring the effects of their actions on each other's profits
when firms are restricted in how much they can produce it is easier for them to avoid excessice comeptition and to divvy up the market thereby pricing above marginal
when firms produce perfect substitutes and have sufficient capacity to satisfy demand when price is equal to marginal cost then each firm will be compelled to engage in competition by undercutting it rivals price until the price reaches marginal cost
when the decision of two or more firms significantly affect others profit
the study of behavior in situations of interdependence
shows how the payoff to each of the participants in a two player game depends on the actions of both
helps analyze interdependence
when would an economist use game theory?
to study firms behavior when there is interdependence between their payoff
when each firm in interdependence has an incentive to cheat but both are worse off if both cheat
an action when it is a players best action regardless of the action taken by the other player
the result when each player in a game chooses the action that maximizes his payoff given the actions of the other players ignoring the effects of this action on the payoffs received by those other players
sacrificing short-run profit to influence future behavior
tit for tat
playing cooperatively at first then doing whatever the other player did in the previous period
when firms limit production and raise prices in a way that raises each others profits even though they have not made any formal agreement
tacit collusion is limited by a number of factors including:
large numbers of firms
complex products and pricing scheme
bargaining power of buyers
conflicts of interest among firms
when collusion breaks down
an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry
what do oligopolist often engaged in to limit competition?
one firm sets its price first and other firms then follow
using advertising and other means to try to increase their sale
oligopolists often avoid competing directly on _________.
when products are differentiated it is sometimes possible for an industry to achieve tacit collusion through _______________.
an action that is always the best regardless of the other players action
kinked demand curve
illustrates how an oligopolist that faces unique changes in its marginal cost within a certain range may decrease not to adjust its output and price in order to avoid a breakdown in tacit collusion