The fundamental characteristics of procuring raw materials are outlined by some companies.
They sold these materials of oligopoly to other firms, which utilized the raw materials to make their final products.
Features of an industry that distributes the assembled products help or hinder efforts to form a cartel to retailers, which then sold the products to that seeks to restrain output and earn consumers.
This type of market structure is the subject of the present chapter.
The firm's top managers wanted to know about the teens' music listening habits.
He noted that the teens had responded to the fact that most other teens were not listening to music on CDs by stopping their own use of CDs.
A situation in which a few large firms comprise essentially an entire industry is an important market structure that we have yet to discuss.
They aren't perfectly competitive in the sense that we have used the term.
Firms in the industry know that other firms will react to their sellers.
The other changes in prices, quantities, and qualities.
An oligopoly market structure can exist for sellers to react to changes in prices.
The entire market is characterized by a small number of interdependent firms.
It's not easy to answer the question.
The majority of industry output is produced by three to five big companies.
Between World War II and the 1970s, three firms produced and sold all of the US's output.
Four large firms produce and sell the entire output of each industry.
All markets and firms are interdependent.
A situation in which one firm's actions with any one firm changes its output, its product price, or the quality of its product, other respect to price, quality, advertising, and firms notice the effects of its decisions.
Any action by one firm with respect to output, price, quality, or countered by the reactions of one or more product differentiation will cause a reaction by other firms.
It is difficult to build dependence interdependence when there are only a few major firms in an industry.
The cigarette industry is constantly reacting to each other.
In the model of perfect competition, each firm ignores the behavior of other firms because they are able to sell all that they want at the going market price.
The pure monopolist doesn't have to worry about the reaction of current rivals because there are no.
It is a game of strategy.
economies of scale is the most common reason offered for the existence of oligopoly.
When economies of scale exist, the firm's long-run average total cost curve will decline.
In a situation in which the minimum efficient scale is relatively large, the average total costs of smaller firms will be more than those of large firms.
They will either go out of business or be absorbed into larger firms.
It is possible that there are barriers to entry that prevent more competition.
Legal barriers include patents and control of critical supplies.
We can find periods in the past when firms were able to keep a barrier in place year after year.
The chemical, electronics, and aluminum industries have been either monopolistic or oligopolistic because of the control of strategic inputs by specific firms.
Firms merging is one of the reasons that oligopolistic market structures may develop.
A merger is the joining of two or more firms.
As output increases, the firm becomes larger, enjoys greater economies of scale, and may be able to influence the market price for the industry's output.
There are two types of mergers.
A firm joining another firm to sell its output.
When a coal sells an output or buys an input, vertical mergers occur.
Two shoe manufacturing firms merging is a horizontal merger.
A horizontal merger is the joining of firms that are producing or group of firms.
We have been talking about the topic in a theoretical way.
There are oligopolies in the United States.
oligopoly is a market structure in which a few interdependent firms produce a large part of total output in an industry.
Before we show the concentration statistics in the United States, we need to know how industry concentration can be measured.
The percentage of total sales or production accounted for by the top four or top eight firms in an industry is the most common way to calculate industry concentration.
Table 26-1 shows the percentage of sales contributed by 25 firms.
A few firms will recognize the interdependence of their output, pricing, and quality decisions.
There isn't a definite answer.
If we picked a four-firm concentration ratio of 75 percent, we could conclude that cigarettes and breakfast cereals were oligopolistic.
We would always be dealing with an arbitrary definition.
The cellphone service provider industry had a four-firm concentration ratio of 82.0 percent.
There are oligopolistic industries in the United States.
If the industry were made up of many smaller firms, consumers might end up paying less.
There is no evidence of serious resource misallocation in the United States because of oligopolies.
The answers can be found on page 593.
The combined entry can be used to measure industry concentration.
The top four firms in the industry accounted for the total.
Mergers involve the merging of one firm with either the supplier of an input or the purchaser of its output.
We can't react in the manner in which one oligopolist reacts to competition.
A change in price, output, or quality is made by another firm in the industry.
Rivals are interdependent.
Strategies are used to describe the various possible firms.
If we want to predict how prices and outputs will be determined in the oligopolistic market, we need to be able to model their strategic behav outcomes in any situation involving two or more individuals.
We can think of reactions of other firms to one firm's actions and plan accordingly.
Poker is a game in which the players explicitly game situation because it involves a strategy of reacting to the actions of others.
Cooperative or noncooperative games can be played.
It's too costly for firms to play coordi, a game in which the players don't cooperate or negotiate.
There are relatively few firms in the marketplace and each game is a cooperative game.
The payoffs can be negative, positive or zero.
A game in which any gains within the group have an absolutely fixed total number of customers, for example, the customers that are offset by equal losses by the end one retailer wins over are exactly equal to the customers that the other retailer loses.
Econo A is a game in which a group of people lose.
Both the buyer and the seller are better off after an exchange.
Any rule that can be used to make a choice.
Strategies that always yield the highest action for the decision maker no matter what the other players do.
Over a long period of time, few business decision makers have successfully implemented a dominant strategy.
Few firms in oligopolistic are used by the player.
An example of game theory is when two people are involved in a bank, if one of them admits, the other will be caught.
She will get 5 years instead of 10.
Sam and Carol don't confess.
Sam's best strategy is still to confess, because Carol can't communicate with him, so he goes free instead of serving 2 years.
If Carol is being with another person, they are given various alternatives.
Even if Sam hasn't confessed, the best strategy is still to be questioned.
She will be free instead of serving 2 years.
To confess is the main strategy for Sam.
Carol uses to confess as her main strategy.
The situation is the same.
Both of them will go to prison for 5 years if they confess to the bank robbery.
This is the dilemma of the prisoners.
Both of them are known to the prisoners.
If neither of them confess, they will each be given a sentence of 2 years.
Each prisoner has a lesser charge.
If one prisoner turns state's evidence into a confession, that prisoner goes free pursuit of his or her own interest is inferior to the other.
Sam admits but Carol doesn't.
There is a famous game in which two prisoners have a choice.
Carol confessed but Sam didn't.
They serve a minimum sentence if they confess.
They serve a longer sentence if both confess.
The one who doesn't confess goes free.
The strategy is always to confess.
A matrix of outcomes, or consequences, of the strategies available to the players Sam's best strategy is to confess also--he'll get only 5 years instead of 10.
Regardless of what the other prisoner does, each prisoner is better off if they confess.
Both of them make $4 million by choosing a low price.
The low-priced firm will make $8 million if one $6 million $8 million chooses a low price.
If they don't collude, they will end up with $6 million and $2 million at the low-priced solution.
Two firms have to decide on their pricing strategy, and we can apply game strategy to them.
The price can be a high or a low.
If they both choose a high price, each will make $6 million, but if they both choose a low price, each will only make $4 million.
If one sets a high price and the other a low one, the low-priced firm will make $8 million, but the high-priced firm will only make $2 million.
In the same way as in the prisoners' dilemma, prisoners will end up choosing low prices.
The prisoners' dilemma shows that cooperative behavior leads to the best outcome for both players.
The player stands to gain by cheating.
Actions that focus on short-run gains all the time.
Opportunistic behavior is something we could engage in.
Long-run benefits of cooperation are check for a purchase knowing that it is going to bounce because you have just closed perceived to be smaller.
If you agree to perform a specific task for pay, you could do it poorly.
The seller may be able to cheat you by selling you a bad item.
We would act in a world of noncooperative behavior if all of us engaged in opportunistic behavior all the time.
That isn't the world in which most of us live.
They want us to keep buying their products.
The sellers want us to come back to their stores.
As labor service sellers, we all want to keep our jobs, get promotions, or be hired away by another firm at a higher wage rate.
In game theory, cooperation that continues chase items from a firm each period as long as the firm provides products of the same as long as the other players continue to quality and abides by any guarantees may be possible.
If the firm fails in any period.
The answers can be found on page 593.
Each oligopolist has a function because oli players collectively lose, perhaps one player more than the gopolistic competitors are interdependent.
One way to end up better.
Decision makers must come up with a plan.
One player's losses are offset by the actions of their competitors in a A __________ strategy.
Let's look at each of the questions in a different way.
They act together to set common prices and output the same outcome that a monopoly firm would aim to achieve: preventing competition.
Common prices and output quota must be set for their members.
Firms can all charge the same profitmaximizing price if they are able to accomplish this task.
The prospect of monopoly profits gives a strong incentive to collude.
A monopoly producer will maximize economic profits by restraining its production to a rate below the competitive rate.
How much each producer will restrain its output is the first problem for the members of the cartel.
The first problem is solved.
Each individual member of the cartel could increase its revenues and profits by charging a slightly lower price if the pro ducers began restraining production and charging a higher price.
If all other members honor their agreement to reduce production, one member could increase its production and boost its economic profits.
There are four conditions that make it more likely that firms will be able to restrain output and detect cheating in order to reduce the temptation of participating firms to cheat.
It is easier to assess how much each firm should restrain production to yield the monopoly output and maximum industry profits if an industry consists of only a few firms.
It is easier for each member of the group to see if other firms are cheating.
When there are only a few members in a group, they might agree to keep their sales below pre-cartel levels.
Failure to do so could be seen as cheating.
It is easier for the cartel members to agree on how much each firm should reduce production if they sell a lot of similar products.
If each firm sells a highly differentiated product, some members can reasonably claim that the prices of their products should differ from the prices of other firms' products to reflect differences in costs of production.
A firm with a differentiated product can reasonably claim that it is selling at a lower price for its differentiated good because its good is less valued by consumers, when in fact the firm may simply be using this claim as an excuse to cheat on the agreement.
One way to make sure that a producer is following the rules is to look at the prices it sells.
If the terms of industry transactions are public, members can more easily spot a firm's efforts to cheat.
If the industry's market is susceptible to frequent shifts in demand for firms' products or in prices of key inputs, the firms' prices will tend to fluctuate.
It will be more difficult to establish a cartel agreement.
Stable demand and cost conditions help a cartel form.
Sometimes cartels use mechanisms that are favorable to buyers to prevent cheating on prices.
A buyer can switch to another seller if the seller offers the product at a lower price.
If a customer can prove that another firm is cheating by offering a lower price, this would be evidence that the other firm is not being honest.
It is very rare for agreements to last more than 10 years.
In many cases, the agreements break down more quickly than that.
The economic profits that firms get from holding prices above competitive levels provide an incentive for new firms to enter the market.
Market entrants can make money if they act as a cheating firm.
Their entry gives incentives to the members of the group to reduce their prices and increase their production.
The variation in economic activity makes it unsustainable.
As consumers' incomes fall, market demands tend to decline across all industries.
Firms that participate in a cartel make profits.
This increases the incentive for firms to cheat.
Zero will be allowed by the U.S. Securities and Exchange Commission.
All of the securities traded in the U.S. are rated by three firms: Moody's, Standard & Poor's, and Fitch.
Three firms assigned essentially identical risk ratings to similar securities and brokerage firms are held by mutual funds.
The U.S. government has erected and charged almost identical fees to do characteristics that some high barriers have perpetuated an oligopoly.
After the financial crash of the late 2000s, no new ratings firms entered the securities-rating industry.
The answers can be found on page 593.
A group of firms in an industry agree to set common prices and limit the amount of money they make.
Firms seeking economic profits that they can coordinate efforts to restrain output and earn economic profits that they can earn are more likely to be in this industry.
Telephones and fax machines are common examples.
If no one else has a phone or fax machine, it's not useful to own how many others have.
People who work on joint projects within a network of other people find it useful to share computer files.
Office productivity software and common spreadsheet programs make trading digital files easier.
When others use the same software, the benefit that each person receives increases.
In industries in which firms produce goods or services that are subject to network effects, there can be sudden spikes in growth, but there can also be significant and sometimes sudden reversals.
A tendency for a good or service to come into the potential for a network effect when an industry's product catches on with more consumers.
Increased use of the product by some consumers leads to other consumers buying the item.
Positive market feedback can affect the industry as a whole.
An example is the market for internet service providers.
The growth of this industry is roughly the same as the growth of the internet.
Positive market feedback resulting from network effects associated with internet communications and interactions resulted in more people wanting to access the internet.
Consumers stop buying an item if a sufficient number of consumers cut back on their use.
The telecommunications industry has experienced negative market feedback recently.
During the late 1980s and early 1990s, traditional telecommunications firms such as AT&T, WorldCom, and Sprint experienced positive market feedback as individuals and firms began making long-distance phone calls from cellphones or fax machines.
E-mail communications and e-mail document attachments have replaced large volumes of phone and fax communications since the mid 1990s.
The use of e-mail and e-mail attachments by some individuals made others follow suit.
Negative market feedback reduced the demand for traditional long-distance phone services.
Some firms can potentially benefit from positive market feedback.
Firms in an industry might sell differentiated products that are subject to network effects.
If the products of two or three firms catch on, these firms will capture the bulk of the sales.
The market for online auction services is a good example.
An individual is more likely to use the services of an auction site if many other potential buyers and sellers also use that site.
In the online auction industry, eBay and Overstock account for more than 80 percent of total sales.
A small number of firms may be able to secure the bulk of the payoffs from positive market feedback in an industry that produces and sells products subject to network effects.
The prevailing market structure is likely to be oligopoly.
The answers can be found on page 593.
When a consumer's demand for a place depends on how many other consumers stop buying the item, there are effects.
Market feedback can be taken.
The capability of a product sold by one firm to offer products that function when used together with other products of that firm's competitors.
A growing number of firms must address these kinds of questions regularly.
Questions about product compatibility are not new.
More than two decades ago, when the possibility of recording television shows and renting part 6 of market structure, resource allocation, and regulation and selling movies for home viewing was a new idea, firms battled over two videocassette formats.
Sony offered a line of videocassette recorders and players that were compatible only with theBeta videocassette format.
The VHS format was developed by another firm, and could hold more videotape.
Soon people were sharing long VHS videotapes of children at play, complete sporting events, and the like with friends and relatives, as long as they had access to VHS players, which other consumer electronics firms were willing to produce.
Sony realized that it had made a mistake when it decided to make its products compatible only with videocassettes.
Sony's sales of video recorders and players were hurt by the decision.
Sony stopped production of theBeta-format products and switched to the VHS format.
Three key economic features were involved in the battle.
A firm that makes and sells effects was present.
Most items are different because people shared their videotapes.
New information technologies have led to the development of many products sold by multiproduct firms and subject to network effects.
Firms face a crucial product compatibility issue.
Sony wanted to earn higher economic profits by incompatibility with VHS.
The demand for VHS-in compatible products disappeared as consumers switched to VHS videocassettes.
Sony's profits from its video businesses plummeted, and the firm had to abandon its video product line.
The answer is no.
Sony lost when it made products incompatible with those offered by other firms.
Firms reap the same types of gains that Sony sought.
Consider Apple's experience with its iPod and iPad products.
Many of Apple's products were incompatible with products sold by other firms.
Apple boosted its profits by making its products incompatible with those of its competitors.
Multiproduct firms can experience either losses or gains if they offer their products in forms that are incompatible with those sold by competing firms.
Why network effects matter to individual firms is something we should consider before we consider how firms' product compatibility choices affect oligopoly outcomes.
Apple's strategy of making its iPod-related product line incompatible with many other items sold by competitors is a good example of a multiproduct firm gaining from this.
Along with the iPod, Apple or firms that paid Apple licensing royalties offered a variety of accessories.
The main goal of opting for incompatibility was for Apple to have a different line of products.
The price elasticity of demand for Apple's product set was reduced by this.
Demand for iPod-related products increased when positive market feedback occurred.
Apple was able to charge higher prices for its entire line of iPod products because of this.
Sony wanted to differentiate its products by making them incompatible with the products offered by other firms.
Sony made its products incompatible with those offered by competitors.
A bandwagon effect led other consumers to choose VHS as well, which led to a wave of substitution away from Sony's video products.
oligopolistic multiproduct firms can't make their own choices about product compatibility because of the decisions of their competitors.
They must take into account the reactions of other firms in light of their strategic dependence.
B profits if it chooses format B.
These $3 million $2 million incompatible product formats are chosen by the firms.
We assume that neither firm believes that network effects are important to the industry in which they operate.
The resulting homogeneity of their product lines will yield only $1 million in profits, if both firms offer their products in Format A.
Both firms will make $2 million in profits if they offer their products in Format B.
If Firm 1 distinguishes its product set by offering it in Format B while Firm 2 chooses Format A, each firm will earn $3 million in profits.
If Firm 1 uses Format A while Firm 2 uses Format B, each firm will make $4 million in profits.
Firm 1 will choose Format A, and Firm 2 will choose Format B.
Each firm has its own format.
Firm 1 will fight for Format A to be the industry standard, and Firm 2 will fight for Format B.
Firms 1 and 2 make videogame systems.
Consumers suddenly become interested in remote gaming via the Internet after the firms decided to use incompatible formats.
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