chapter
thirteen
Oligopoly: Firms in Less Competitive Markets
Prepared by: Fernando & Yvonn Quijano
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Oligopoly
Oligopoly A market structure in
which a small number of
interdependent firms compete.
The approach we use to analyze
competition among oligopolists
is called game theory.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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1 LEARNING OBJECTIVE
Oligopoly and Barriers to Entry
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Barriers to Entry
13 - 1
Examples of Oligopolies in
Retail Trade and Manufacturing
Barrier to entry Anything that keeps
new firms from entering an industry in
which firms are earning economic profits.
RETAIL TRADE
INDUSTRY
MANUFACTURING
FOUR-FIRM
CONCENTRATION
RATIO
INDUSTRY
FOUR-FIRM
CONCENTRATION
RATIO
Warehouse Clubs and
Superstores
90%
Cigarettes
99%
Discount Department Stores
88%
Beer
90%
Hobby, Toy, and Game
Stores
70%
Aircraft
85%
Radio, Television, and Other
Electronic Stores
62%
Breakfast Cereal
83%
Athletic Footwear Stores
62%
Automobiles
80%
College Bookstores
58%
Dog and Cat Food
58%
Pharmacies and Drugstores
47%
Computers
45%
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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Oligopoly and Barriers to Entry
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Barriers to Entry
In addition to economies of scale,
other barriers to entry include:
• Ownership of a key input
• Government–Imposed Barriers
• Patent The exclusive right to a product
for a period of 20 years from the date the
product was invented.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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2 LEARNING OBJECTIVE
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to Analyze Oligopoly
Game theory The study of how people make decisions in
situations where attaining their goals depends on their
interactions with others; in economics, the study of the
decisions of firms in industries where the profits of
each firm depend on its interactions with other firms.
Key characteristics of all games:
1. Rules that determine what actions are allowable.
2. Strategies that players employ to attain their
objectives in the game.
3. Payoffs that are the results of the interaction among
the players’ strategies.
Business strategy Actions taken by a business firm to
achieve a goal, such as maximizing profits.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to Analyze Oligopoly
A Duopoly Game: Price Competition between Two
Firms
13 - 2
Payoff matrix A table that
shows the payoffs that each
firm earns from every
combination of strategies by
the firms.
A Duopoly Game
Collusion An agreement
among firms to charge the
same price, or to otherwise
not compete.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to Analyze Oligopoly
A Duopoly Game: Price Competition between Two
Firms
Dominant Strategy A strategy that
is the best for a firm, no matter what
strategies other firms use.
Nash equilibrium A situation
where each firm chooses the best
strategy, given the strategies chosen
by other firms.
13 - 1
A Beautiful Mind: Game Theory Goes to the Movies
In the film, A Beautiful Mind,
Russell Crowe played John Nash,
winner of the Nobel Prize in
Economics.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to Analyze Oligopoly
Firm Behavior and the Prisoners’ Dilemma
Cooperative equilibrium An
equilibrium in a game in which
players cooperate to increase their
mutual payoff.
Noncooperative equilibrium
An equilibrium in a game in which
players do not cooperate but pursue
their own self-interest.
Prisoners’ dilemma A game
where pursuing dominant strategies
results in noncooperation that leaves
everyone worse off.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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13 - 1
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
2 LEARNING OBJECTIVE
Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi?
Advertising is the
optimal decision
for both firms,
given the decision
by the other firm.
13 - 2
Is There a Dominant Strategy for Bidding on eBay?
On eBay, bidding the maximum
value you place on an item is a
dominant strategy.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to
Analyze Oligopoly
Can Firms Escape the
Prisoners’ Dilemma?
13 - 3
Changing the Payoff Matrix in a
Repeated Game
13 - 3
American Airlines and Northwest Airlines
Fail to Cooperate on a Price Increase
The airlines have trouble raising
the price this business traveler
pays for a ticket.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to Analyze Oligopoly
Cartels: The Case of OPEC
13 - 4
World Oil Prices
Cartel A group of firms that
colludes by agreeing to restrict
output to increase prices and
profits.
Sustaining high prices has been difficult because
members often exceed their output quotas.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Using Game Theory to Analyze Oligopoly
Cartels: The Case of OPEC
13 - 5
The OPEC Cartel with Unequal
Members
The equilibrium of this game will occur
with Saudi Arabia producing a low output
and Nigeria producing a high output.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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3 LEARNING OBJECTIVE
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Sequential Games
Deterring Entry
13 - 6
The Decision Tree for an Entry
Game
The best decision for
Wal-Mart is to build a
large store to deter
Target’s entry.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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13 - 1
CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
4 LEARNING OBJECTIVE
Is Deterring Entry Always a Good Idea?
In this case, Wal-Mart will build a small store and Target will enter.
Deterrence is only worth pursuing if its costs are not too high.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Sequential Games
Bargaining
13 - 7
The Decision Tree for a Bargaining
Game
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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CHAPTER 13: Oligopoly: Firms in Less
Competitive Markets
Barrier to entry
Business strategy
Cartel
Collusion
Cooperative equilibrium
Dominant strategy
Economies of scale
Game theory
Nash equilibrium
Noncooperative equilibrium
Oligopoly
Patent
Payoff matrix
Prisoners’ dilemma
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
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