The document discusses different market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. It focuses on defining oligopoly, which features a few large firms, similar products, interdependent competition based on products rather than price, high barriers to entry and exit, and imperfect information for consumers. It provides examples of concentration ratios in various US industries and notes that as the number of firms in an oligopoly increases, the market begins to resemble perfect competition with price approaching marginal cost.

1. 1. Consider the 3 market structures we have
learned so far
2. What do they seem to depend on?
Mankiw
Ch17

2. Perfect
Competition
Monopolistic
Competition
Oligopoly Monopoly

3. Oligopoly
 Features:
 Few large firms
 Very similar products
 Interdependent
 Firms compete on products, not price
 Very difficult to start new firm
 Very difficult to close down firm
 Not fully informed consumers

4. Measuring Market Concentration
 Concentration ratio: the percentage of the
market’s total output supplied by its four largest
firms.
 The higher the concentration ratio,
the less competition.

5. Concentration Ratios in Selected U.S.
Industries Industry Concentration ratio
Video game consoles 100%
Tennis balls 100%
Credit cards 99%
Batteries 94%
Soft drinks 93%
Web search engines 92%
Breakfast cereal 92%
Cigarettes 89%
Greeting cards 88%
Beer 85%
Cell phone service 82%
Autos 79%

6. OLIGOPOLY
6
The Size of the Oligopoly
 As the number of firms in the market increases,
 the price effect becomes smaller
 the oligopoly looks more and more like a competitive
market
 P approaches MC
 the market quantity approaches the socially efficient
quantity
Another benefit of international trade:
Trade increases the number of firms competing,
increases Q, brings P closer to marginal cost
Automakers as example

7. Special type of Oligopoly
 Duopoly
 Oligopoly with only 2 firms
 Comic books
 Coke vs. Pepsi

8. King of the Hill
 Graph before collusion
 Propane market structure?
 Graph after collusion show profits, don’t move ATC

9. If firms discuss and agreed on
new prices…
This is called collusion.
And you formed a cartel.
Collusion = setting of prices by rival firms
Cartel = groups of rival firms that try to fix prices to
increase profits
**Drug cartels – don’t compete on price
In the United States, it is illegal

10. Mankiw Pages 369
#1-2