CHAPTER 11
Imperfect Competition
© 2012 McGraw-Hill Ryerson Limited
11-1
LO4
Oligopoly
Characteristics
• It is dominated by a few large firms.
• Entry by new firms is difficult.
• Non-price competition between firms is widely
practiced.
• Each firm has significant control over its price.
• Mutual interdependence exists between firms.
• Products can be either homogeneous or
differentiated.
© 2012 McGraw-Hill Ryerson Limited
11-2
LO4
Oligopoly
Mutual interdependence
• the condition in which a firm’s actions depend, in
part, on the reactions of rival firms
© 2012 McGraw-Hill Ryerson Limited
11-3
LO5
Collusion
Collusion
• an agreement among suppliers to set the price of a
product or the quantities each will produce
Game Theory
• a method of analyzing firm behaviour that
highlights mutual interdependence among firms
© 2012 McGraw-Hill Ryerson Limited
11-4
LO5
Game Theory
Nash Equilibrium
• a situation where each rival chooses the best
actions given the (anticipated) actions of the
other(s)
© 2012 McGraw-Hill Ryerson Limited
11-5
LO5
Game Theory
© 2012 McGraw-Hill Ryerson Limited
11-6
LO5
Collusive Oligopoly
Cartel
• an association of sellers acting in unison
• for example, Organization of Petroleum Exporting
Countries (OPEC)
• able to increase prices by restricting output
• cartels work to the advantage of their members
only if there is no cheating among the participants
© 2012 McGraw-Hill Ryerson Limited
11-7
LO6
Non-collusive Oligopoly
Price Leadership
• When rival firms engage in what amounts to price
fixing without overt collusion
• A leader – usually the largest or most efficient firm
– sets price, other firms follow
• Must balance the advantages of a price increase
with the risks of creating an opening for new
entrants
© 2012 McGraw-Hill Ryerson Limited
11-8
LO6
Oligopoly
• Some believe that oligopolies are too powerful and
produce inefficiently
• Others take the view that oligopolies are at the
cutting edge of new technological development
and, in the long run, push the average costs of
production down
© 2012 McGraw-Hill Ryerson Limited
11-9