Oligopoly
An oligopoly is a market
number of sellers is small.structure in which the
Oligopoly requires strategic thinking, unlike
perfect competition, monopoly, and
monopolistic competition.
• Under perfect competition, monopoly,
and monopolistic competition, a seller
faces a well-defined demand curve for its
output and should choose the quantity
where MR=MC. The seller does not
worry about how other sellers will react,
because either the seller is negligibly
small, or already a monopoly.
• Under oligopoly, aYou
seller is big enough to
affect the market. must respond to
your rivals’ to
choices, but your rivals are
responding your choices.
In oligopoly markets,andthere is a tension If all
between cooperation self-interest.
the firms limit have
their an
output, the price is high,
but then firms incentive to expand
output.
The techniques of game theory are used to
solve for the equilibrium of an oligopoly
market.
“Duopoly” example: Jack and Jill choose how
many gallons of water to pump and sell in
town.
costs. To keep things simple, assume zero
The demand schedule gives us the priceofthe
buyers are willing to pay, as a function the
total combined output of Jack and Jill.
If the market the
structure were perfectly
competitive, market supply curve would be
be
based on marginal costs, so the price would
zero and theefficient
quantityoutcome.
would be 120. This is
the socially
The price effect is smaller for duopoly than
monopoly, and the quantity effect favors more
output whenever the price is above marginal
An oligopoly is a market
number of sellers is small.structure in which the
Oligopoly requires strategic thinking, unlike
perfect competition, monopoly, and
monopolistic competition.
• Under perfect competition, monopoly,
and monopolistic competition, a seller
faces a well-defined demand curve for its
output and should choose the quantity
where MR=MC. The seller does not
worry about how other sellers will react,
because either the seller is negligibly
small, or already a monopoly.
• Under oligopoly, aYou
seller is big enough to
affect the market. must respond to
your rivals’ to
choices, but your rivals are
responding your choices.
In oligopoly markets,andthere is a tension If all
between cooperation self-interest.
the firms limit have
their an
output, the price is high,
but then firms incentive to expand
output.
The techniques of game theory are used to
solve for the equilibrium of an oligopoly
market.
“Duopoly” example: Jack and Jill choose how
many gallons of water to pump and sell in
town.
costs. To keep things simple, assume zero
The demand schedule gives us the priceofthe
buyers are willing to pay, as a function the
total combined output of Jack and Jill.
If the market the
structure were perfectly
competitive, market supply curve would be
be
based on marginal costs, so the price would
zero and theefficient
quantityoutcome.
would be 120. This is
the socially
The price effect is smaller for duopoly than
monopoly, and the quantity effect favors more
output whenever the price is above marginal
