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Understanding Market Structures: Oligopoly and Strategic Behavior

Learn about market structures, shutdown rules, profit maximization, and factors influencing market power. Dive into oligopoly dynamics, barriers to entry, game theory, collusion, and forces shaping the economy.

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Understanding Market Structures: Oligopoly and Strategic Behavior

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  1. Basic Market Concepts • Shutdown Rule • P > AC, making a  • AVC < P < AC, SR loss, maybe OK • P < AVC, shutdown. • Profit Maximizing Quantity • where MC = MR • Market Power • ability to set the market price • HH Index (Sum of squares of Market Share)

  2. Factors that determine Market Structure • Number of Buyers and Sellers • Barriers to Entry / Exit • Regulation (patent etc.) • Sole Ownership • Scale Economies (Natural Monopolies) • Are the Products Homogenous / Differentiated

  3. 4 Market Structures

  4. Characteristics of the 4 Market Structures

  5. Oligopoly: Strategic Behavior • Barriers to entry that can lead to oligopoly. • The prisoner’s dilemma model. • Game theory analyzes behavior of oligopolists. • Equilibrium may differ in games • with repeated plays • played only once. • Explicit and implicit collusion. • Why and when cheating is likely in a cartel. • Forces operating to restrict and reduce the extent of oligopoly in the economy.

  6. A Summary of Market Structures

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