Chapter 26 Oligopoly

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Editors NotesA. Part II Product and Factor Markets should be read as an introduction to this chapter, especially by those using
                              
McConnell Economics Books or involved with Test Prep, CLEP, or AP Economics projects.
                          B. Our
Current Events Internet Library has an interesting economics section.
I. Introduction

   A. An oligopoly market exists when barriers to entry result in a few m
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utually dependent companies controlling a 
          substantial portion of a market. 
          1. Products may be homogeneous or
differentiated.
          2. Examples include many industrial products such as
steel and large consumer durables such as appliances. 
          3. Automobile, steel,
game consoles and other oligopolistic industries lost monopoly power because of the 
              foreign invasion beginning in the 1970's.
              a. Eventually American companies became more competitive.
              b. The price was lower real wages for manufacturing workers.
              c.  The oligopolistic nature of the video game consol market
          4. Concentration ration measure the amount of total output controlled by a few firms.

               a
. eight-firm concentration ratio - AmosWEB is Economics ...
               b
. four-firm concentration ratio provides examples of possible oligopoly industries and companies.
           5. Wikipedia provides the following on high concentration industries
               a. Six
movie studios movie studios receive 90% of American film revenues.
               b. The television industry is mostly an oligopoly of five companies:
Disney/ABC, CBS Corporation,
                   NBC Universal, Time Warner
, and News Corporation.[37] See Concentration of media ownership.
               c. Four major
music companies receive 80% of recording revenues.
               d. Four wireless providers control 89% of the cellular telephone market.
[38]
                   
e. There are just six major book publishers.
               f. Healthcare insurance in the United States consists of very few insurance companies controlling
                  major market share in most states. For example, California's insured population of 20 million is
                  the most competitive in the nation and 44% of that market is dominated by two insurance 
                  companies,  Anthem and
Kaiser Permanante. [39]
                  
g. Anheuser-Busch and Miller Coors control about 80% of the beer industry.[40]
  
B Three well-defined pricing models exist
       1. Kinked demand
 
       2. Collusive pricing
       3. Price leadership

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II. Kinked demand  
 
    A. Describes a situation where a strong interdependency exists
          among firms within an industry
     B. A firm's demand curve tends to be elastic above equilibrium price
          as price increases are not followed by competitors. If they do follow,
          industry  supply has changed.
     C. A firm's demand curve tends to be inelastic below equilibrium price as
           price decreases must be followed by competing firms. 
          If competitors do not follow, a monopoly situation could be developing. 
     D. This interdependency of pricing is studied with game theory models
           where
          participants react to possible pricing situations in a similar manner to the
          strategy of people playing chess or poker.
     E.
Econ Concepts in 60 Seconds: Kinked Demand Curve
      F.
Kinked demand curve theory from You Tube
     G.
Need more, try Kinked Demand from Amos Web.
 
    H. Profit model

  IV. Restrictive vs. progressive oligopolies
     A. Restrictive oligopolies
          1. A few companies share a market creating a near monopoly situation.
          2. Example: Rust Belt industries in the United States before foreign  
              competition.
      B. Progressive oligopolies
          1. Technology lowers cost and improves product quality.
          2. Companies must maintain technological base to survive.
          3. Low consumer prices, high product quality, and monopoly profits
             
exist simultaneously. 
          4. As long as new product development causes growth in consumer
              demand, funds are provided for R & D and capital investment
              requirements.
         
5. Examples include computer software and high-tech consumer
              electronics

I. Collusive pricing is when a  formal agreement (cartel) or informal agreement among competitors to
   restrict supply and benefit from the resulting high price (OPEC).

See trustbusters-have-got-better-detecting-cartels-and-bolder-punishing-them-incentives 3/29/14

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 V. Economic analysis of oligopoly
      A. Restrictive oligopolies tend to be very monopolistic in nature with
           1. P > MR = MC
           2. Production is not at the lowest point indicated by the ATC curve.
           3. Economic profits exist and quantity is restricted.
      B. Progressive oligopolies have high economic profits in spite of price decreases brought on by
              high-tech efficiencies.

VI. Desoligopolization is the disappearance of an oligopoly. (Material from Wikipedia)
       A. Oligopoly Watch
       B.  Read POWER ELITES IN AMERICA: OLIGOPOLY AND POLITICAL PULL
               (OR, BEWARE THE REGULATORY-INDUSTRIAL COMPLEX),
By Sam Wells
                for a conservative view for Monopoly development from Human Freedom and the Laissez-Faire Republic
VII. Additional Materials
      A.
King On Knowledge, Power and Unchecked and Unbalances -  Audio
      B. Big banks are operating as an 'oligopoly' Video in England's problem with the U.S. in the same situation
      C. Read POWER ELITES & MONOPOLY POWER for a conservative view of monopoly power.  
          Interestingly, I couldn't find   much pro antitrust material. Reason-our competitive world.
     
D. Class Discussion Question: Based on this 50 minute video, is our political system a monopoly, 
          oligopoly, or purely competitive?
     
E. Listen to
The Limits of Power
Bill Moyers sits down with history and international relations expert and
          former US Army Colonel Andrew J. Bacevich who identifies three major problems facing our democracy: 
          the crises of economy, government and militarism, and calls for a redefinition of the American way of life.
      F. Planned Obsolescence Disguised as Innovation, Oligopoly Disguised as a Free Market, and the Enrichment of Oligarchs

VIII. Game theory is used by oligopolies to model their behavior.
       A. Econ Concepts in 60 Seconds Video on Oligopolies and Game Theory  and
Dominate Strategy
       B. Examples 
           1. The Prisoners Dilemma #1      
Prisoner's Dilemma Game from Bryn Mawr College
           2.
Game Theory The Meeting Game
           3. Goldon Bollocks is a You Tube game theory game.
           4. A Money Gane

Practice Quizzes

amosweb practice test by specific topic. Oligopoly, answers provided.

Monopolistic Competition and Oligopoly multiple choice practice questions, no answers provided

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