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Chapter 7 MARKET STRUCTURES Monopoly amp Oligopoly
ITrsquoS MISTER SMITH TO
YOU Moneybags
Market Structures
Economists classify a firmrsquos market structure based upon its producing and selling environment
Four market structures Perfect competition Monopoly Monopolistic competition Oligopoly
Perfect CompetitionPure Competition
Perfect competition is a market with a large number of firms all producing essentially the same product
Perfect competition assumes that the market is in equilibrium and that all firms sell the same product for the same price
Firms choose how much to supply Examples Farm Products NYSE
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market
2 Sellers offer identical products3 Buyers and sellers are well
informed about products4 Sellers are able to enter and exit
the market freely
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market--No one can influence the price The market itself determines price and output (supplydemand)
Conditions for Perfect Competition
2 Sellers offer identical products-- Commodities Products that are considered the same regardless of who makes or sells themExamples milk notebooks
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Market Structures
Economists classify a firmrsquos market structure based upon its producing and selling environment
Four market structures Perfect competition Monopoly Monopolistic competition Oligopoly
Perfect CompetitionPure Competition
Perfect competition is a market with a large number of firms all producing essentially the same product
Perfect competition assumes that the market is in equilibrium and that all firms sell the same product for the same price
Firms choose how much to supply Examples Farm Products NYSE
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market
2 Sellers offer identical products3 Buyers and sellers are well
informed about products4 Sellers are able to enter and exit
the market freely
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market--No one can influence the price The market itself determines price and output (supplydemand)
Conditions for Perfect Competition
2 Sellers offer identical products-- Commodities Products that are considered the same regardless of who makes or sells themExamples milk notebooks
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Perfect CompetitionPure Competition
Perfect competition is a market with a large number of firms all producing essentially the same product
Perfect competition assumes that the market is in equilibrium and that all firms sell the same product for the same price
Firms choose how much to supply Examples Farm Products NYSE
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market
2 Sellers offer identical products3 Buyers and sellers are well
informed about products4 Sellers are able to enter and exit
the market freely
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market--No one can influence the price The market itself determines price and output (supplydemand)
Conditions for Perfect Competition
2 Sellers offer identical products-- Commodities Products that are considered the same regardless of who makes or sells themExamples milk notebooks
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market
2 Sellers offer identical products3 Buyers and sellers are well
informed about products4 Sellers are able to enter and exit
the market freely
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market--No one can influence the price The market itself determines price and output (supplydemand)
Conditions for Perfect Competition
2 Sellers offer identical products-- Commodities Products that are considered the same regardless of who makes or sells themExamples milk notebooks
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Conditions for Perfect Competition
1 Many buyers and sellers participate in the market--No one can influence the price The market itself determines price and output (supplydemand)
Conditions for Perfect Competition
2 Sellers offer identical products-- Commodities Products that are considered the same regardless of who makes or sells themExamples milk notebooks
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Conditions for Perfect Competition
2 Sellers offer identical products-- Commodities Products that are considered the same regardless of who makes or sells themExamples milk notebooks
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Conditions for Perfect Competition
3 Buyers and sellers are well informed about products--Buyers and sellers know enough about the market to find the best deal
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Conditions for Perfect Competition
4 Sellers are able to enter and exit the market freely--Firms must be able to enter a market when they can make money and leave the market when they are not
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Barriers to Entry
Factors that make it difficult for new firms to enter the market
Barriers to entry can lead to imperfect competition
Imperfect competition is a market structure that does not meet the conditions of perfect competition
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Barriers to Entry cont Two barriers
Start- up costs Expenses that a new business must pay before the first product reaches the customer
Example Pizzeria ndash need an oven cheese boxes dough machine
Technology High skills and scientific knowledge needed to enter the market
Example Pizzeria ndash need to know how to run a computer carpentry make pizza
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Price and Output
Prices in a perfectly competitive market are the lowest sustainable prices possible because competition drives prices down to the point where prices just cover the cost of production
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Section 2 Monopoly
A monopoly is a market structure in which only one seller sells a product for which there are no close substitutes
The supplier is a price-maker the business does not have to consider competition
Monopolies are illegal in the US
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Examples of
Monopolies
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
bull Miner and buyer of 70-90 of worldrsquos diamonds
bull Price-maker
bull Created barriers to entry to other companies
bull Marketed as proof of LOVE the diamond engagement ring is basically a DeBeers invention
TM
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Forming a Monopoly1 Economies of Scale Factors that
cause a producerrsquos average cost to drop as production rises
Characteristics High start-up costs (factory
machinery etc) Cost (average per unit) drops as
output rises
Example Dam Industries with economies of scale can
easily become a natural monopoly
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Nuclear power plant
cost of producing power in the first couple of hours is much greater than the cost of producing additional power
ECONOMIES OF SCALE
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Forming a Monopoly cont2 Natural Monopolies A market that
runs most efficiently when one large firm provides all of the output
Allowed and regulated by the government
If a competitor enters the market one or both of the firms would go out of business
price charged would go down but so would quantity sold so costs would be greater for both companies
Example Public water electric company (digging reservoirs overlapping piping pumping stations)
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Forming a Monopoly cont
Technology can replace natural monopoliesExample Telephone
Expensive copper wires did not allow for competition (in the old days)
Now radio waves- modern cellular phones allow people to choose
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Government Monopolies
Government monopolies are created when the government makes barriers to entry in markets
Patents (Government-issued) give companies exclusive rights to sell a new good or service for a specific amount of time
Guarantee companies can profit from their own research without competition
Patents give companies MARKET POWER
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
EXAMPLES
bullSubway system
bullPublic water supply
bullMail
bullElectricity
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Government Monopolies contFranchise the right to sell a
good or service within an exclusive marketExamples National Park Service- food vendor
License a government-issued right to operate a businessExamples RadioTV broadcasts (limited frequencies land etc)
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Industrial Organizations
The government allows the companies in an industry to restrict the number of firms in a marketRARE
Example MLB ndash allowed to choose which cities have baseball teams (otherwise all cities would want teams and that would mess everything up)
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Monopolies and Price
Monopolies cannot charge any price it wants
Price does determine demand for almost all goods or services
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Price Discrimination
Price Discrimination is the practice of dividing customers into two or more groups based on how much they will pay for a good Each group has a different maximum
price they will pay Targeted discounts Identify those
customers not willing to pay regular price and offer discounts
Example Senior citizen discounts on movie tickets
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Section 3 Monopolistic Competition amp Oligopoly
Most markets are NOT monopolies or perfect competition types
The most popular market structures fall under TWO categoriesMonopolistic Competition andOligopoly
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Monopolistic Competition Monopolistic Competition is a
market structure in which many companies sell products that are similar but not identical Example JEANS All jeans are
considered denim pants but consumers have choices of brands color styles and sizes
Other examples gas bagels ice cream
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Monopolistic Competition cont
The FOUR Conditions of Monopolistic CompetitionMany firmsFew artificial barriers to entrySlight control over priceDifferentiated products
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
The Four Conditions of Monopolistic Competition
MANY FIRMS Low start- up costs allow firms to spring
up quickly to join the market quickly FEW ARTICIFICAL BARRIERS TO
ENTRY No patents- either because they are
expired or because the product is distinct enough
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
The Four Conditions of Monopolistic Competition cont
SLIGHT CONTROL OVER PRICE Firms can have a little control over
price because each firmrsquos products are a little different and people are willing to pay more for that difference
If a firm charges too much the consumer will substitute a rivalrsquos product
Example CokePepsi vs store brand
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
The Four Conditions of Monopolistic Competition cont
DIFFERENTIATED PRODUCTSFirms can distinguish
themselves and their goods from the other products
Example Name brandndash Nike Puma Adidas
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Nonprice Competition
Nonprice Competition is a way to attract customers through style service or location but not a lower price
Nonprice Competition takes many different forms Physical Characteristics Location Service Level Advertising image or status
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Nonprice Competition cont
1 Physical CharacteristicsOffer new size color shape
texture taste Example sneakers pens cars
2 LocationDetermines how much a firm can
charge Example Desert gas station
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Nonprice Competition cont
3 Service LevelFirms can charge more because of
the services they offer 4 Advertising Image
StatusFirms can differentiate their
products from others through advertising
Example Prada Dolce amp Gabbana
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Price Output amp Profits
Prices Prices can be higher than with perfect competition because firms have the power to raise prices
Output Total output is in between perfectly competitive firms and monopolies
Profit Firms earn just enough to cover all of their costs
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Oligopoly
An oligopoly is a market structure in which a few large firms dominate the marketThe four largest firms produce 70-80
of the outputUsually set prices higher and output lower
Examples air travel breakfast cereal household appliances
The distinctive feature of oligopolies is interdependence among firms
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Oligopoly cont
Barriers to Entry 1 High start- up costs
(machinery airplanes)
2 Government licensespatents3 Economies of scale
(only 3 or 4 firms can remain profitable If more firms enter no one will profit)
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Some firms work together to act as a monopoly (illegal)
Practices that concern the Government
Price Leadership Collusion Cartel
Cooperation and Collusion
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Cooperation and Collusion cont
Price Leadership Market leader sets priceCan lead to price wars A
series of competitive price cuts that lowers the market price below the cost of production bad for producers good for
consumers
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Cooperation and Collusion cont
Collusion An agreement among firms to divide the market set prices and production levels
Illegal in the United StatesAn outcome of collusion isPrice fixing An agreement among
firms to charge one price for the same good
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Cartels A formal organization of producers that agree to coordinate prices and production
If each member of the cartel obeys theestablished agreement then joint profitsin the industry are maximized
Illegal in the US but legal in other countries and international organizations
Cartels usually do not last long
1048708
Cooperation and Collusion cont
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Prisonerrsquos Dilemma at End of Show if Time Allowshellip
Starts at Slide 47
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Section 4 Regulation amp Deregulation
Predatory Pricing Selling a product below cost to drive competition out of the market
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Government amp Competition
The government uses a number of policies to keep firms from controlling the price and supply of important goods
The Federal Trade Commission and the Department of Justicersquos Antitrust Division watch firms closely to ensure that firms do not unfairly force out competitors
These policies are known as antitrust laws
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Government amp Competition cont
Antitrust Laws Laws that encourage competition in the marketplace
Trust Like a cartel a trust is an illegal grouping of companies that discourages competition
Breaking up monopolies Standard Oil (Rockefeller) 1911AT amp T 1982
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Government amp Competition cont Blocking Mergers To prevent
monopolies the government can stop mergers that might reduce competition and lead to higher prices
Merger A combination of 2 or more companies into a single firm
Prices will rise if the number of firms in an industry falls
The government must act carefully because some mergers might help the customer with lower prices
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Deregulation
Deregulation is the removal of some government control over a market
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Cartels and the PrisonerrsquosDilemma
Each firm has an incentive to cheat by producing more Situation fits a ldquoPrisonerrsquos Dilemmardquo -- game theory
Ann and Pete are arrested and put in different cells They are guilty What should they do Confess or stay quiet
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Payoff matrix
Confess Remain silent
Confesseach
5 yearsNicole (10
years)Krystie (free)
Remain silentNicole (free)Krystie (10
years)
each6 months
Nicole
Krystie
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Possible outcomes
Nicole confesses Krystie confesses Nicole 5 years Krystie 5 years
Nicole confesses Krystie does notNicole free Krystie 10 years
Krystie confesses Nicole does notNicole 10 years Krystie free
Neither confesses each gets 6 months
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
What will Nicole doCONFESS
In deciding what to do in strategic situations it is normally important to predict what others will do This is not the case here Hence THE DILEMMA
If you knew the other prisoner would stay silent your best move is to confess as you then walk free instead of receiving the minor sentence If you knew the other prisoner would confess your best move is still to confess as you receive a lesser sentence than by staying quiet Confessing is a dominant strategy
The other prisoner reasons similarly and therefore also chooses to confess By both defecting they get a lower payoff than they would get by staying quiet
Rational self-interested play results in each prisoner being worse off than if they had stayed silent
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Cont
Note that the paradox of the situation lies in that the prisoners are not defecting in hope that the other will not Even when they both know the other to be rational and selfish they will both play defect Defect is what they will play no matter what even though they know fully well that the other player is playing defect as well and that they will both be better off with a different result
One experiment based on the simple dilemma found that approximately 40 of participants cooperated (ie stayed silent)
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
Prisonerrsquos Dilemma
The outcome of games do not always lead to the best result for all parties
In the prisonerrsquos dilemma both parties would be better off if they colluded and did not confess
However each individual in seeking to maximize his or her advantage chooses an outcome that does not maximize the joint benefit
Outcomes
Cooperative outcome Non-cooperative outcome
