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Chapter 17-Oligopoly.pptx
1.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PowerPoint Slides prepared by: V. Andreea CHIRITESCU Eastern Illinois University 1 Principles of Economics, Ninth Edition N. Gregory Mankiw
2.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 17 Oligopoly 2
3.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Oligopoly • Oligopoly –Only a few sellers –Offer similar or identical products –Interdependent • Game theory –How people behave in strategic situations • Choose among alternative courses of action • Must consider how others might respond to the action he takes 3
4.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 1 • A small group of sellers, oligopolists –Tension between cooperation and self- interest –Best off cooperating, acting like a monopolist • Produce a small quantity of output • Charge P >MC –Each firm cares only about its own profit • Powerful incentives not to cooperate 4
5.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 2 • Duopoly –Oligopoly with only two members –Decide what quantity to sell –Price is determined on the market by the demand 5
6.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 1 The Demand Schedule for Water Quantity Price Total Revenue (and total profit) 0 gallons $120 $0 10 110 1,100 20 100 2,000 30 90 2,700 40 80 3,200 50 70 3,500 60 60 3,600 70 50 3,500 80 40 3,200 90 30 2,700 100 20 2,000 110 10 1,100 120 0 0 6
7.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 3 • For a perfectly competitive firm –Price = marginal cost –Quantity is efficient • For a monopoly –Price > marginal cost –Quantity is lower than the efficient quantity 7
8.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 4 • A duopoly can: –Collude and form a cartel, act as a monopoly and agree on: • Total level of production • Quantity produced by each member –Don’t collude, act in self-interest • Difficult to agree; Antitrust laws • Higher quantity; lower price; lower profit • Not competitive allocation • Nash equilibrium 8
9.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 5 • Collusion –Agreement among firms in a market • Quantities to produce or • Prices to charge • Cartel –Group of firms acting in unison 9
10.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Equilibrium for an Oligopoly, Part 1 • Nash equilibrium –Economic actors interacting with one another –Each choose their best strategy –Given the strategies that all the other actors have chosen 10
11.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Equilibrium for an Oligopoly, Part 2 • Oligopolists –Better off cooperating and reaching the monopoly outcome –They pursue their own self-interest • Do not end up reaching the monopoly outcome and maximizing their joint profit • Each is tempted to raise production and capture a larger share of the market • Total production rises and price falls 11
12.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Equilibrium for an Oligopoly, Part 3 • When firms in an oligopoly individually choose production to maximize profit –Produce a quantity of output • Greater than the level produced by monopoly • Less than the level produced by competition –The price is • Less than the monopoly price • Greater than the competitive price (MC) 12
13.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 6 • If oligopolists form a cartel –Maximize total profit –Produce monopoly quantity –Charge monopoly price –Difficult to reach and enforce an agreement as the size of the group increases 13
14.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 7 • If oligopolists do not form a cartel, each firm has to take into account: –The output effect • Because P > MC, selling one more unit increases profit –The price effect • Increasing production increases total amount sold • Decrease in price and lower the profit 14
15.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Markets with Only a Few Sellers, Part 8 • The size of an oligopoly affects the market outcome –As the number of sellers in an oligopoly grows larger • Oligopolistic market looks more like a competitive market • Price approaches marginal cost • Quantity produced approaches socially efficient level 15
16.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ASK THE EXPERTS Nash Equilibrium 16
17.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Economics of Cooperation, Part 1 • The prisoners’ dilemma –Particular “game” between two captured prisoners –Illustrates why cooperation is difficult to maintain even when it is mutually beneficial • Dominant strategy –Strategy that is best for a player in a game • Regardless of the strategies chosen by the other players 17
18.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 1 The Prisoners’ Dilemma 18
19.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Economics of Cooperation, Part 2 • The prisoners’ dilemma –Because each pursues his or her own interests • The two prisoners together reach an outcome that is worse for each of them –Cooperation between the two prisoners is difficult to maintain • Because cooperation is individually irrational 19
20.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Economics of Cooperation, Part 3 • Game oligopolists play –In trying to reach the monopoly outcome –Similar to the game that the two prisoners play in the prisoners’ dilemma • Firms are self-interested –And do not cooperate • Even though cooperation (cartel) would increase profits –Each firm has incentive to cheat 20
21.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 2 Jack and Jill’s Oligopoly Game 21
22.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPEC and the World Oil Market, Part 1 • Organization of Petroleum Exporting Countries (OPEC) is a cartel –Formed in 1960: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela –By 1973: Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon –Control about 80 percent of the world’s oil reserves 22
23.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPEC and the World Oil Market, Part 2 • OPEC –Tries to raise the price of its product • Coordinated reduction in quantity produced –Tries to set production levels for each of the member countries • Problem –The countries want to maintain a high price of oil 23
24.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPEC and the World Oil Market, Part 3 • Problem –Each member of the cartel • Tempted to increase its production • Get a larger share of the total profit • Cheat on agreement • OPEC – successful at maintaining cooperation and high prices –From 1973 to 1985: increase in price 24
25.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. OPEC and the World Oil Market, Part 4 • Mid-1980s — member countries began arguing about production levels –OPEC — ineffective at maintaining cooperation –Decrease in price –Recent years: less successful at reaching and enforcing agreements • Fluctuations in oil prices –Driven by supply and demand 25
26.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Economics of Cooperation, Part 4 • Arms races –After World War II, United States and the Soviet Union • Engaged in a prolonged competition over military power –Strategies • Build new weapons • Disarm –Dominant strategy: Arm 26
27.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 3 An Arms-Race Game 27
28.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Economics of Cooperation, Part 5 • Common resources –Two companies own a common pool of oil –Strategies • Each company drills one well • Each company drills a second well and get more oil –Dominant strategy • Each company drills two wells: lower profit 28
29.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 4 A Common-Resources Game 29
30.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Welfare of Society • Dominant strategy –Noncooperative equilibrium may be bad for society and the players • Examples: Arms race game, Common resource game –Noncooperative equilibrium may be good for society • Oligopolists trying to obtain monopoly profits • Quantity and price – closer to optimal level 30
31.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why People Sometimes Cooperate • Game of repeated prisoners’ dilemma –Repeat the game –Agree on penalties if one cheats –Both have incentive to cooperate –As long as the players care enough about future profits, they will choose to forgo the one-time gain from defection 31
32.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Prisoners’ Dilemma Tournament, Part 1 • Repeated prisoners’ dilemma –The score at the end of the game is the total number of years in jail –Encourage cooperation • Penalty for not cooperating –Better strategy • Return to cooperative outcome after a period of noncooperation 32
33.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Prisoners’ Dilemma Tournament, Part 2 • Repeated prisoners’ dilemma –Best strategy: tit-for-tat –Player starts by cooperating, then do whatever the other player did last time –Starts out friendly –Penalizes unfriendly players –Forgives them if warranted 33
34.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Public Policy Toward Oligopolies, Part 1 • Governments –Can sometimes improve market outcomes • Policymakers –Try to induce firms in an oligopoly to compete rather than cooperate –Move the allocation of resources closer to the social optimum 34
35.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Public Policy Toward Oligopolies, Part 2 • Antitrust laws –The Sherman Antitrust Act, 1890 • Elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy –The Clayton Act, 1914 • Further strengthened the antitrust laws –Used to prevent mergers –Used to prevent oligopolists from colluding 35
36.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. An Illegal Phone Call, Part 1 • Robert Crandall — president of American Airlines • Howard Putnam — president of Braniff Airways – Crandall: I think it’s dumb as hell . . . to sit here and pound the @#$% out of each other and neither one of us making a #$%& dime. – Putnam: Do you have a suggestion for me? – Crandall: Yes, I have a suggestion for you. Raise your $%*& fares 20 percent. I’ll raise mine the next morning. 36
37.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. An Illegal Phone Call, Part 2 – Putnam: Robert, we . . . – Crandall: You’ll make more money, and I will, too. – Putnam: We can’t talk about pricing! – Crandall: Oh @#$%, Howard. We can talk about any &*#@ thing we want to talk about. • The Sherman Antitrust Act – Prohibits competing executives from even talking about fixing prices 37
38.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Public Policy Toward Oligopolies, Part 3 • Controversies over antitrust policies –Used to condemn some business practices whose effects are not obvious –Resale price maintenance –Predatory pricing –Tying 38
39.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Public Policy Toward Oligopolies, Part 4 • Resale price maintenance (fair trade) –Require retailers to charge customers a given price –Might seem anticompetitive • Prevents the retailers from competing on price –Defenders: • Not aimed at reducing competition • Legitimate goal: some retailers offer service 39
40.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Public Policy Toward Oligopolies, Part 5 • Predatory pricing –Charge prices that are too low • Anticompetitive • Price cuts may be intended to drive other firms out of the market –Skeptics • Predatory pricing — not a profitable strategy • Price war — to drive out a rival’ prices are driven below cost 40
41.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Public Policy Toward Oligopolies, Part 6 • Tying –Offer two goods together at a single price • Expand market power – Skeptics • Cannot increase market power by binding two goods together –Form of price discrimination • Tying may increase profit 41
42.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Microsoft Case, Part 1 • U.S. government’s suit against the Microsoft Corporation, 1998 –Central issue: tying • Should Microsoft be allowed to integrate its Internet browser into its Windows operating system –Bundling to expand market power into the market of Internet browsers • Would deter other software companies from entering the market and offering new products 42
43.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Microsoft Case, Part 2 • Microsoft responded –New features into old products - natural part of technological progress • Cars — include CD players, air conditioners • Cameras — built-in flashes • Operating systems — added many features to Windows – Previously stand-alone products – Computers - more reliable and easier to use –Integration of Internet technology • The next natural next step 43
44.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Microsoft Case, Part 3 • Disagreement –Extent of Microsoft’s market power • The government –More than 80% of new personal computers • Used a Microsoft operating system • Substantial monopoly power “Me? A monopolist? Now just wait a minute . . .” 44
45.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Microsoft Case, Part 4 • Microsoft –Software market is always changing –Competitors: Apple Mac & Linux operating systems –Low price – limited market power • November 1999 ruling –Microsoft — great monopoly power –Illegally abused that power 45
46.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Microsoft Case, Part 5 • June 2000 –Microsoft – to be broken up into two companies • Operating system & Applications software • 2001, appeals court –Overturned the breakup order • September 2001 –Justice Department — wanted to settle the case quickly 46
47.
N. Gregory Mankiw,
Principles of Economics, 9th Edition © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Microsoft Case, Part 6 • Settlement: November 2002 –Microsoft – some restrictions –Government – browser would remain part of the Windows operating system • Private antitrust suits • Suits brought by the European Union –Alleging a variety of anticompetitive behaviors 47
Editor's Notes
N. Gregory Mankiw Principles Of EconomicsNinth Edition
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