Oligopoly Market Structure

Characteristics of Oligopolies

• A market structure in which a small number of firms compete with each other
• Interdependent decision-making: firms consider the potential reactions of their competitors when making decisions
• Non-price competition: firms often engage in advertising, product differentiation, and other forms of non-price competition to gain an advantage

Types of Oligopolies

• Homogeneous oligopoly: firms produce identical products (e.g., steel, aluminum)
• Differentiated oligopoly: firms produce differentiated products (e.g., cars, smartphones)

Oligopoly Models

• Cournot Model:
  • Firms simultaneously choose their output levels
  • Firms take into account the potential reactions of their competitors
• Stackelberg Model:
  • One firm (the leader) sets its output level first
  • The other firms (the followers) then set their output levels
• Bertrand Model:
  • Firms simultaneously choose their prices
  • Firms take into account the potential reactions of their competitors

Collusion and Cartels

• Collusion: agreements among firms to limit competition and increase profits
• Cartel: a formal agreement among firms to fix prices, output, or other competitive variables
• Antitrust laws: regulations that prohibit collusive agreements and other anti-competitive practices

Oligopoly and Welfare

• Deadweight loss: the loss of efficiency that results from oligopolistic behavior
• Rent-seeking: the allocation of resources to unproductive activities, such as advertising and lobbying, in an attempt to gain an advantage
• Welfare loss: the loss of consumer surplus and producer surplus due to oligopolistic behavior

Characteristics of Oligopolies

• A market structure characterized by a small number of firms competing with each other
• Firms engage in interdependent decision-making, considering potential reactions of competitors
• Firms often use non-price competition, such as advertising and product differentiation, to gain an advantage

Types of Oligopolies

• Homogeneous oligopoly: firms produce identical products, e.g. steel and aluminum
• Differentiated oligopoly: firms produce differentiated products, e.g. cars and smartphones

Oligopoly Models

Cournot Model

• Firms simultaneously choose output levels, considering potential reactions of competitors
• Firms aim to maximize profits by anticipating competitors' output levels

Stackelberg Model

• One firm (the leader) sets its output level first
• Other firms (the followers) then set their output levels, anticipating the leader's reaction

Bertrand Model

• Firms simultaneously choose prices, considering potential reactions of competitors
• Firms aim to maximize profits by anticipating competitors' prices

Collusion and Cartels

• Collusion: agreements among firms to limit competition and increase profits
• Cartel: a formal agreement among firms to fix prices, output, or other competitive variables
• Antitrust laws: regulations prohibiting collusive agreements and other anti-competitive practices

Oligopoly and Welfare

• Deadweight loss: the loss of efficiency resulting from oligopolistic behavior
• Rent-seeking: allocation of resources to unproductive activities, such as advertising and lobbying, to gain an advantage
• Welfare loss: loss of consumer surplus and producer surplus due to oligopolistic behavior