Explain what an Oligopoly is and how it is different from Monopolistic Competition.
Describe a real world Oligopoly. Indicate the firms and explain how they compete.
What is unique about individual firms’ decision-making in Oligopolies?
Can firms in Oligopolies earn an economic profit?
Explain.
Suppose these firms collude and form a cartel. Using a real life example, explain how a cartel can be stable over the Long Run.
What incentives are there for a cartel to break apart?
Suppose that the cartel breaks apart and the firms engage in very active price competition, as if they were in a perfectly competitive market. Explain how the market price and quantity is now different from
Oligopoly:
Monopolistic Competition:
In an oligopoly, firms are interdependent, meaning that the actions of one firm can significantly impact the decisions of others. This interdependence leads to strategic behavior, where firms carefully consider the potential reactions of rivals before making pricing or output decisions. This can result in price rigidity, as firms may be reluctant to engage in price wars that could harm all players.
Yes, firms in oligopolies can earn economic profits in the long run, especially if they can differentiate their products or collude. However, the extent of these profits depends on factors such as the degree of product differentiation, the intensity of competition, and the effectiveness of collusion.
A cartel is a group of firms that collude to fix prices or output levels. Cartels can be stable in the long run if:
However, cartels are inherently unstable due to the incentive for individual firms to cheat. If a firm can increase its profits by secretly lowering its price or increasing its output, it may be tempted to do so. This can lead to a breakdown of the cartel and a return to more competitive behavior.
If a cartel breaks down and firms engage in price competition, the market price will likely decrease, and the quantity produced will increase. This is because firms will attempt to undercut each other’s prices to gain market share. The market outcome will approach that of a perfectly competitive market, with lower prices and higher output.