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Chapter 10: Q.11 (page 252)
Will the firms in an oligopoly act more like a
monopoly or more like competitors? Briefly explain.
Oligopoly will behave like both the monopoly and competitor.
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Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.
a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel
supply? How much profit will the cartel earn?
b. Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry?
c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.
Make a case for why monopolistically competitive industries never reach long-run equilibrium.
Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm
(Firm A) is large and the other firm (Firm B) is small, as the prisoner鈥檚 dilemma box in Table 10.4 shows.
| Firm B colludes with firm A | Firm B cheats by selling more output | |
| Firm A colludes with firm B | A gets \(1000,B gets \)100 | A gets \(800, B gets \)200 |
| Firm A cheats by selling more output | A gets \(1050, B gets\)50 | A gets \(500, B gets \)20 |
Assuming that both firms know the payoffs, what is the likely outcome in this case?
When OPEC raised the price of oil dramatically in the mid-, experts said it was unlikely that the cartel could stay together over the long term鈥攖hat the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.
Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a given type, like shoes. Perhaps a better question is, 鈥淲hat is the right amount of variety? Can there be too many varieties of shoes, for example?鈥�
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