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Oligopoly Games
Part (a) shows each firms cost curves.
Part (b) shows the market demand curve.
Oligopoly Games
This industry is a natural duopoly.
Two firms can meet the market demand at the least cost.
Oligopoly Games
How does this market work?
What is the price and quantity produced in equilibrium?
Oligopoly Games
Suppose that the two firms enter into a
collusive agreement.
A collusive agreement is an agreement
between two (or more) firms to restrict
output, raise price, and increase profits.
Such agreements are illegal in the United
States and are undertaken in secret.
Firms in a collusive agreement operate a
cartel.
Oligopoly Games
The possible strategies are:
Comply
Cheat
Because each firm has two strategies,
there are four possible outcomes:
Both comply
Both cheat
Trick complies and Gear cheats
Gear complies and Trick cheats
Oligopoly Games
The first possible outcomeboth complyearns
the maximum economic profit, which is the same
as a monopoly would earn.
Oligopoly Games
To find that profit, we set marginal cost for the
cartel equal to marginal revenue for the cartel.
Figure 13.9 shows this outcome.
Oligopoly Games
The cartels marginal cost curve is the horizontal
sum of the MC curves of the two firms and the
marginal revenue curve is like that of a monopoly.
Oligopoly Games
The firms maximize economic profit by
producing the quantity at which MCI = MR.
Oligopoly Games
Each firm agrees to produce 2,000 units and
each firm shares the maximum economic
profit.
Oligopoly Games
When each firm produces 2,000 units, the price
is greater than the firms marginal cost, so if one
firm increased output, its profit would increase.
Oligopoly Games
Figure 13.10 shows what happens when one firm
cheats and increases its output to 3,000 units.
Industry output rises to 5,000 and the price falls.
Oligopoly Games
For the complier, ATC now exceeds price.
For the cheat, price exceeds ATC.
Oligopoly Games
The complier incurs an economic loss.
The cheat earns an increased economic profit.
Oligopoly Games
Either firm could cheat, so this figure shows two
of the possible outcomes.
Next, lets see the effects of both firms cheating.
Oligopoly Games
Figure 13.11 shows the outcome if both firms
cheat and increase their output to 3,000 units.
Oligopoly Games
Industry output is 6,000 units, the price falls, and
both firms earn zero economic profitthe same
as in perfect competition.
Oligopoly Games
Youve now seen the four possible outcomes:
If both comply, they make $2 million a week
each.
If both cheat, they earn zero economic profit.
If Trick complies and Gear cheats, Trick incurs
an economic loss of $1 million and Gear makes
an economic profit of $4.5 million.
If Gear complies and Trick cheats, Gear incurs
an economic loss of $1 million and Trick makes
an economic profit of $4.5 million.
The next slide shows the payoff matrix for the
duopoly game.
Payoff
Matrix
Tricks
view
of the
world
Tricks
view
of the
world
Gears
view
of the
world
Gears
view
of the
world
Equilibrium
Oligopoly Games
The Nash equilibrium is where both firms cheat.
The quantity and price are those of a competitive
market, and the firms earn normal profit.
An R & D Game
Procter & Gamble and Kimberley Clark play an R
& D game in the market for disposable diapers.