WHAT’S NEW IN THE SIXTH EDITION: There is a new In the News box on ”The Next Big Antitrust Target?”
LEARNING OBJECTIVES: By the end of this chapter, students should understand: what outcomes are possible when a market is an oligopoly.
the prisoners’ dilemma and how it applies to oligopoly and other issues.
how the antitrust laws try to foster competition in oligopolistic markets.
CONTEXT AND PURPOSE: Chapter 17 is the final chapter in a five-chapter sequence dealing with firm behavior and the organization of industry. Chapters 14 and 15 discussed the two extreme forms of market structure—competition and monopoly. The market structure that lies between competition and monopoly is known as imperfect competition. There are two types of imperfect competition—monopolistic competition, which we addressed in the previous chapter, and oligopoly, which is the topic of the current chapter.
The purpose of Chapter 17 is to address oligopoly—a market structure in which only a few sellers offer similar or identical products. Because there are only a few sellers in an oligopolistic market, oligopolistic firms are interdependent whereas competitive firms are not. That is, in a competitive market, the decisions of one firm have no impact on the other firms in the market while in an oligopolistic market, the decisions of any one firm may affect the pricing and production decisions of the other firms in the market.
KEY POINTS: Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels that would prevail under perfect competition.
The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual interest. The logic of the prisoners’ dilemma applies in many situations including arms races, advertising, common-resource problems, and oligopolies.
Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. The application of these laws can be controversial, because some behavior that may seem to reduce competition may in fact have legitimate business purposes.