Transcript Micro_Module 64-28

Module
Micro: 28
Econ: 64
Introduction to Oligopoly
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• Why oligopolists have an incentive to act
in ways that reduce their combined profit.
• Why oligopolies can benefit from
collusion.
Understanding Oligopoly
• “Few” producers
• Remember HHI
• Interdependence
Collusion and Competition
• Oligopoly firms can
increase their profits by
colluding to restrict
output or raise price.
• Maintaining collusive
agreements is difficult
because there is an
incentive to cheat
• Collusion is illegal
Price versus Quantity Competition
• Bertrand
• Price competition
• Competitive outcome
• Cournot
• Quantity competition
• Economic profits
Price versus Quantity Competition
• Joseph Bertrand (1822-1900) showed that when
firms are selling an identical product, oligopolists
will repeatedly lower price to undercut the
competition. This process ends at the perfectly
competitive outcome where P=MC.
• Augustin Cournot (1801-1877) focused on quantity
competition, rather than price competition. Again
assuming a homogenous product, duopoly firms
choose output to maximize profit, given the output
of the rival firm. There exists an equilibrium level
of output that allows each firm to earn profits that
are below monopoly-level profits, but are above
normal profits.
Table 64.1 Demand Schedule for Lysine
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers