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Chapter 16
Copyright 2001 by Harcourt, Inc.
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Imperfect Competition
Imperfect competition refers to
those market structures that fall
between perfect competition and
pure monopoly.
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Imperfect Competition
Imperfect competition includes
industries in which firms have
competitors but do not face so
much competition that they are
price takers.
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Types of Imperfectly
Competitive Markets
Oligopoly
Only
Monopolistic
Competition
Many
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Monopoly
Few
firms
Type of Products?
Differentiated
products
Oligopoly
Tap
water
Tennis
balls
Cable TV
Crude oil
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Identic
al
product
s
Monopolisti
c
Competitio
n
Perfect
Competitio
n
Novels
Wheat
Movies
Milk
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Characteristics of an Oligopoly
Market
Few sellers offering similar or identical
products
Interdependent firms
Best off cooperating and acting like a
monopolist by producing a small
quantity of output and charging a price
above marginal cost
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A Duopoly Example
A duopoly is an oligopoly with
only two members. It is the
simplest type of oligopoly.
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Price
$120
110
100
90
80
70
60
50
40
30
20
10
0
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Total Revenue
$ 0
1,100
2,000
2,700
3,200
3,500
3,600
3,500
3,200
2,700
2,000
1,100
0
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Cartel
The
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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price
$120
110
100
90
80
70
60
50
40
30
20
10
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Total Revenue
$ 0
1,100
2,000
2,700
3,200
3,500
3,600
3,500
3,200
2,700
2,000
1,100
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
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Confess
Bonnie gets
8 years
Confess Clyde
Clydes
Decision
Remain
Silent
Remain
Silent
Bonnie gets
20 years
Clyde goes
free
gets
8 years
Bonnie
goes free
Clyde
gets
20 years
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Bonnie gets
1 year
Clyde gets
1 year
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Oligopolies as a
Prisoners Dilemma
Iraqs Decision
High
Production
High
Production Iran gets
Irans
Decision
Low
Productio
n
Iraq gets
$40 billion
$40 billion
Iraq gets
$60 billion
Iran gets
$30
billion
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Low
Production
Iraq gets
$30 billion
Iran gets
$60 billion
Iraq gets
$50 billion
Iran gets
$50
billion
Oligopolies as a
Prisoners Dilemma
Self-interest makes it difficult for the
oligopoly to maintain a cooperative
outcome with low production, high
prices, and monopoly profits.
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An Arms-Race Game
Decision of the United States
(U.S.)
Arm
Decision
of the
Soviet
Union
(USSR)
Arm
Disarm
U.S. at risk
USSR
at risk
U.S. safe
and
powerful
USSR at
risk and
weak
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Disarm
U.S. at risk
and weak
USSR safe
and
powerful
U.S. safe
USSR
safe
An Advertising Game
Marlboros Decision
Advertise
Advertise
Camels
Decision
Camel
gets $3
billion
profit
Marlboro
gets $3
billion profit
Marlboro
gets $5
billion profit
Dont
Camel
Advertise gets $2
billion
profit
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Dont
Advertise
Marlboro
Camel gets
$5 billion
profit
gets $2
billion
profit
Marlboro
gets $4
Camel billion profit
gets $4
billion
profit
A Common-Resources Game
Exxons Decision
Drill Two
Wells
Exxon gets
$4 million
Drill Two
profit
Wells Arco gets
Arcos
Decision
Drill One
Well
$4 million
profit
Exxon gets
$6 million
profit
Arco gets
$3 million
profit
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Arco gets
$6 million
profit
Exxon gets
$5 million
profit
Arco gets
$5 million
profit
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Sell 40
gallons
Jack gets
Sell 40
gallons
Jills
Decision
Sell 30
gallons
Jack gets
$1,500
profit
$1,600
profit
Jill gets
$1,600
profit
Sell 30
gallons Jill gets
Jill gets
$2,000
profit
Jack gets
$2,000
profit
$1,500
profit
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Jack gets
$1,800 profit
Jill gets
$1,800 profit
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Predatory Pricing
Predatory pricing occurs when a large
firm begins to cut the price of its
product(s) with the intent of driving its
competitor(s) out of the market.
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Tying
Tying refers to when a firm offers
two (or more) of its products together
at a single price, rather than
separately.
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Summary
Oligopolists maximize their total profits
by forming a cartel and acting like a
monopolist.
If oligopolists make decisions about
production levels individually, the result
is a greater quantity and a lower price
than under the monopoly outcome.
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Summary
The prisoners dilemma shows that selfinterest can prevent people from
maintaining cooperation, even when
cooperation is in their mutual selfinterest.
The logic of the prisoners dilemma
applies in many situations, including
oligopolies.
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Summary
Policymakers
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Graphical
Review
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Monopoly
Few
firms
Type of Products?
Differentiated
products
Oligopoly
Tap
water
Tennis
balls
Cable TV
Crude oil
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Identic
al
product
s
Monopolisti
c
Competitio
n
Perfect
Competitio
n
Novels
Wheat
Movies
Milk
Confess
Bonnie gets
8 years
Confess Clyde
Clydes
Decision
Remain
Silent
Remain
Silent
Bonnie gets
20 years
Clyde goes
free
gets
8 years
Bonnie
goes free
Clyde
gets
20 years
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Bonnie gets
1 year
Clyde gets
1 year
Oligopolies as a
Prisoners Dilemma
Iraqs Decision
High
Production
High
Production Iran gets
Irans
Decision
Low
Productio
n
Iraq gets
$40 billion
$40 billion
Iraq gets
$60 billion
Iran gets
$30
billion
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Low
Production
Iraq gets
$30 billion
Iran gets
$60 billion
Iraq gets
$50 billion
Iran gets
$50
billion
An Arms-Race Game
Decision of the United States
(U.S.)
Arm
Decision
of the
Soviet
Union
(USSR)
Arm
Disarm
U.S. at risk
USSR
at risk
U.S. safe
and
powerful
USSR at
risk and
weak
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Disarm
U.S. at risk
and weak
USSR safe
and
powerful
U.S. safe
USSR
safe
An Advertising Game
Marlboros Decision
Advertise
Advertise
Camels
Decision
Camel
gets $3
billion
profit
Marlboro
gets $3
billion profit
Marlboro
gets $5
billion profit
Dont
Camel
Advertise gets $2
billion
profit
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Dont
Advertise
Marlboro
Camel gets
$5 billion
profit
gets $2
billion
profit
Marlboro
gets $4
Camel billion profit
gets $4
billion
profit
A Common-Resources Game
Exxons Decision
Drill Two
Wells
Exxon gets
$4 million
Drill Two
profit
Wells Arco gets
Arcos
Decision
Drill One
Well
$4 million
profit
Exxon gets
$6 million
profit
Arco gets
$3 million
profit
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Arco gets
$6 million
profit
Exxon gets
$5 million
profit
Arco gets
$5 million
profit
Sell 40
gallons
Jack gets
Sell 40
gallons
Jills
Decision
Sell 30
gallons
Jack gets
$1,500
profit
$1,600
profit
Jill gets
$1,600
profit
Sell 30
gallons Jill gets
Jill gets
$2,000
profit
Jack gets
$2,000
profit
$1,500
profit
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Jack gets
$1,800 profit
Jill gets
$1,800 profit