If you keep running, the competition will bite you; if you stand still, they will swallow you.
We talked about competition, monopoly, and a blend of the two.
When making decisions, a firm must take into account the expected reaction of other firms, because there are a small number of firms in an industry.
Oligopolistic firms can be collusive or noncollusive.
There is a big difference between monopolistic competition and oligopoly.
Firms take other firms' actions into account.
In monopolistic competition, individual firms tend not to take into account the likely responses of their rivals.
It is difficult to co-exist.
Pricing decisions are strategic in oligopolies.
Collusion is much easier in oligopolies.
Market Structure distinguishes between monopolistic competition and oligopoly by whether or not firms explicitly take into account competitors' reactions to their decisions.
Economists can model and predict the price and output of an industry.
Predicting nonstrategic decision making can be done fairly accurately.
Even if people behave rationally, strategic deci sion making is hard to predict.
Oligopolistic firms are mutually dependent on what others expect the one person to do.
A model of monopolistic competition will tell us how much will be produced and how much will be charged.
Economists' models of oligopoly do not have a definite reaction from other firms.
There are no unique price and output decisions that competitors will not make.
Most industries in the United States have some oligopolistic elements.
Is it true that monopolistic competitors use almost any businessperson whether he or she directly takes into account rivals' likely strategic decision making?
If the market is seen to extend beyond your neighborhood, most retail stores may be quite competitive.
They keep a close eye on their competitors' prices.
There are five or six formal models, but I will focus on two informal models that give you insight into real-world problems.
The contestable market model is one of the two models we'll con sider.
These should show you how pricing works in the real world.
The reason is due to the interdependence of oligopolists.
Since there are few competitors, an oligopolist's plan must always be a contingency or strategic plan.
If my competitors act one way, I'll do X, but if they act another way, I'll do Y.
Strategic interactions have a variety of potential outcomes rather than a single outcome.
oligopolists spend a lot of time guessing what their competitors will do and develop a strategy of how they will act accordingly.
In Chapter 20, we will discuss that game theory has developed interdependent decisions.
The appendix shows how game theory can be applied to decisions.
If oligopolies are able to limit entry by other firms, they will make more money.
Firms follow a uniform pricing policy.
Car telization is the best strategy for an oligopoly since a monopolist makes the most profit that can be squeezed from a market.
It is against the law in the United States to have explicit formal colludes, but there are ways to collude.
There is some relevance to the model.
There are some problems with the model.
Collective interest of the firms in the industry isn't clear because of the different interests of various firms.
If the smaller firms face barriers to entry or the dominant firm has lower cost conditions, this model will not work.
If that were not the case, the smaller firms would pick up an increasing share of the market.
The temporary nature of the market is shown by that market.
Xerox's market share fell as it became more competitive on cost and quality.
Today's market is more competitive than it used to be.
Sometimes the various firms meet at a golf course or at a trade association gathering, and arrive at a collective decision.
Meeting for this purpose is illegal in the United States.
Firms collude in some cases to make a collective decision.
In which firms charge the same price but don't meet to discuss price strategy isn't against the law.
They operate as close to the law as they can.
Many industries allow a price leader to set the price, and the others follow suit.
The steel industry takes that route.
Firms charge the same price or close to it.
You can see it in other industries as well.
Most independent carpenters in small towns charge the same price.
If a carpenter offered to work for less than the others, he or she would not be welcomed at the breakfast restaurant.
The Miami fish market is where sport fishermen sell their catch.
I used to go to the docks to buy fresh fish when I lived in Miami.
The prices were the same at about 20 stands.
The price fluctuated, but at the end of the day the word would spread that the price could be reduced.
I got to know some of the sellers and asked them why they priced like that, when it would be in their interest to set their own price.
Social pressures play an important role in stabilizing prices in an oligopoly.
There is a gap in it.
It is important to remember that technological changes are constantly occurring, and that a successful cartel with high profits will provide incentives for technological change, which can eliminate demand for its monopolized product.
In the U.S. busi nesses, informal collusion happens all the time.
One characteristic of informal collusive behavior is that prices don't change very often.
Prices are sticky because of informal colluding.
It's not the only reason.
Another possible reason is that firms don't collude, but do have certain reactions from other firms that change their perceived demand curves.
They think that the demand curve they face is not straight.
The demand curve is used to explain why firms don't use lower prices to increase sales.
Let's go through the reasoning behind the demand curve.
It will lose business to other firms that have not raised their prices.
The firm assumes that all other firms will match the decrease in price, so it won't gain any additional sales.
The assumptions are made when the demand curve is not straight.
The marginal revenue curve must have a gap when the demand curve is not perfect.
The firm's gap will not be changed.
Firms will change their price if there is a large shift in marginal cost.
The reason behind the kink is the intuitive answer.
If other firms don't go along with a price hike, the firm will lose market share.
Other firms will go along and the firm won't gain market share when the price is lowered.
The firm doesn't want to change its price in either direction.
The kinked demand curve is not a theory of pric ing.
The theory of sticky prices does not explain why the original price is what it is.
The contestable market model is a second model of oligopoly.
The price that an oligopoly will charge in the contestable market model will exceed the cost of production only if new firms cannot exit and enter the market.
The higher the barriers, the higher the price.
Barriers to entry and exit are not based on market structure.
The price an oligopolist sets will be is the same as the competitive price.
If the industry contains only one firm, it could set competitive prices and still be a competitive market if output levels are high.
There is no "oligopolistic model" because of the importance of social pressures.
A monopolist solution can be reached by oligopolies with a stronger ability to collude.
The perfectly competitive solution is Equilibrium of oligopolies with weaker social pressures and less ability to prevent new entry.
An oligopoly's price will be somewhere between the competitive price and the monop olistic price.
The results between these two are given by other models of oligopolies.
Much of what happens in pricing is dependent on the legal structure of the firms.
In Japan, where large firms are allowed to collude, we see Japanese goods that are more expensive than those in the United States.
Before international competition, Japanese televisions were more expensive than their US counterparts.
The pricing strategy U.S. oligopolists would follow is based on the behavior of Japanese firms.
The threat from outside competition is one of the things that limits oligopolies from acting as a Cartel.
The threat will be more effective if the competitor is larger.
Small-town banks have a tendency to collude, offering lower interest to savers and charging higher interest to borrowers than big banks charge, even though their average costs aren't significantly higher.
I am told by small-town banks that my perception is faulty and that I should mind my own business.
If a big bank enters the town and opens a branch office, the interest rates on deposits seem to go up and the interest rates on borrowers seem to go down.
Competition that couldn't come from within the town can be added by the big bank.
Many of the new dynamic companies in our economy do to a particular app and, once they are comfortable using it, not produce products, but rather provide platforms for stick with it even when prices rise.
While the enormous competition between the two companies is holding their fares down, this will not likely happen to people who are still using them.
There are strong pres who are willing to drive people where they want to go for the sake of a merger.
There is an agreement to share the market.
Econo used an app on his phone.
The two companies that have been set up to avoid have designed their apps to look like many of the rules and regulations that will make a merger easier.
Competition for rides is fierce just before a merger as each tries to gain a strategic advantage.
The results of strategic competition are hard to quantify.
The CEO's offhand com investors were predicting that eventually both companies would change the results.
Economists would be able to use their market power to provide high, have developed a tool, game theory, to study this interac profits in the future.
This tool will be explored in a later chapter.
International firms often compete on a national scale.
There are many examples of this outside competition breaking down the cartels.
A long-run demand curve is very elastic, and a group with no barriers to entry faces that.
The price will be close to its marginal cost and average cost.
This is the same predic tion that came from the market theory.