TAILIEUCHUNG - Ten Principles of Economics - Part 35

Ten Principles of Economics - Part 35. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 16 OLIGOPOLY 351 Figure 16-1 The Four Types of Market Structure. Economists who study industrial organization divide markets into four types monopoly oligopoly monopolistic competition and perfect competition. Reality of course is never as clear-cut as theory. In some cases you may find it hard to decide what structure best describes a market. There is for instance no magic number that separates few from many when counting the number of firms. Do the approximately dozen companies that now sell cars in the United States make this market an oligopoly or more competitive The answer is open to debate. Similarly there is no sure way to determine when products are differentiated and when they are identical. Are different brands of milk really the same Again the answer is debatable. When analyzing actual markets economists have to keep in mind the lessons learned from studying all types of market structure and then apply each lesson as it seems appropriate. Now that we understand how economists define the various types of market structure we can continue our analysis of them. In the next chapter we analyze monopolistic competition. In this chapter we examine oligopoly. I QUICK QUIZ Define oligopoly and monopolistic competition and give an example of each. MARKETS WITH ONLY A FEW SELLERS Because an oligopolistic market has only a small group of sellers a key feature of oligopoly is the tension between cooperation and self-interest. The group of oligopolists is best off cooperating and acting like a monopolist producing a 352 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY small quantity of output and charging a price above marginal cost. Yet because each oligopolist cares about only its own profit there are powerful incentives at work that hinder a group of firms from maintaining the monopoly outcome. A DUOPOLY EXAMPLE To understand the behavior of oligopolies let s consider an oligopoly with only two members called a duopoly. Duopoly is the simplest type

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