WarmUp Draw a correctlylabeled graph for both a

Warm-Up • Draw a correctly-labeled graph for both a perfectly-competitive firm and a monopolist operating at longrun equilibrium. • Indicate the equilibrium price and quantity

Simulation • Form into teams of 4 • Earn the most money to win • Play either an “X” or “O” card • Receive payoff based on decision • DO NOT talk with other groups

Introduction to Oligopolies Chapter 15: Oligopoly (pages 388 -395)

Oligopolies Defined

Examples of Oligopoly • Pepsi vs. Coke • OPEC • Wireless phone providers • TV services • Airlines • Computer operating systems

Oligopolies are … • Interdependent –Decisions by one firm impact others –Success dependent on others • Duopolies (in simplest form) –Consists of 2 firms in a market –Have significant incentives to cheat

Working Together… • Firms have incentive to collude • Strongest form of collusion is a cartel –Formal agreement to collude –Illegal in the U. S. • May result in non-cooperative behavior (cheating)

Gas Station Example… • 2 stations in town • Each has 50% of the market • MC = $1/gallon

But How Do We Know? • Herfindahl-Hirschman Index (HHI) 2 2 2 MS 1 + MS 2 + MS 3 = HHI • Used to define the market structure –HHI < 1, 000 Perfectly competitive – 1, 001 < HHI < 1, 500 Somewhat –HHI > 1500 Oligopoly

Examples of HHI Industry HHI Largest Firms Market Structure PC operating systems 9, 182 Microsoft, Linux Oligopoly Wide-body aircraft 5, 098 Airbus, Boeing Oligopoly Automobiles 1, 432 GM, Ford, Toyota, Honda Moderately competitive Retail grocers 321 Wal-Mart, Safeway, Competitive Kroger, Albertsons, Wegmans, Costco

How Firms compete… • Quantity competition –When output is fixed –Firms “divvy” up market –Limited opportunity to cheat • Price competition –Firms try to “undercut” competition –Leads to outcome where P=MC