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					Two theories of Imperfect Competition
   Imperfect competition: more than one seller
   competes with other sellers;
  ...each firm has control over the price they charge.
• Two market structures lie between the two extremes
   of Monopoly and Perfect Competition…
   Monopolistic competition & Oligopoly
• These two market structures are the most common
   in the economy…most goods and services are
   produced by firms that are monopolistically
   competitive or oligopolistic.
• The major differences between Monopolistic
   competition and Oligopoly is the number of firms in
   the industry and how much of the market those
   firms control.
         Monopolistic competition
A. Characteristics
    1. There are a relatively large number of firms.
          Each firm produces a small part of the total
                 market share in the industry.
    2. Each firm produces a similar, but not identical
   product...
   ...each firm produces a differentiated product
• These differences arise because of: the quality of
   good, packaging, image, service, brand name, etc.
However, each firm is said to be in the same Product
   Group...
...closely related, but not identical, goods that serve the
   same purpose for consumers.
         Monopolistic competition
 3. Relative freedom of entry and exit exist.
   The need to establish a differentiated product makes
   entry slightly more difficult than perfect competition.
B. Implications
   Because a firm only produces a small market share,
   each firm will have little effect on the market share
   of other firms…
...so firm’s won’t react to other firms choice of output
   and price…
…moreover, because of the number of firms in the
   industry, cooperation to set price among firms is not
   possible.
Examples of Monopolistically competitive industries
     Percent of value of shipment of product
     Industry            four eight twenty # of firms
Software Publishing      39.5    45.6   56.3      9,953
Pharmaceutical prep.      37.1   52.7   74.1        707
Book Publishing           32.3   45.2    58.9       690
Men & Boys’ Dress Shirts 22.1    30.2   43.8        636
Auto Parts               21.2    30.5   38.8     57,698
Medical Equipment        18.6    32.4    54.7    12,123
Jewelry                   14.4   19.8    30.3     3,737
Digital Printing          10.3   17.4    33.1       386
Women’s & Misses’ Dresses 6.5     9.9    16.0     7,056
These are national industries.
• An example of monopolistic competition on a local level
  is family restaurants…
…each one is fairly small, performs the same function, but
  has different quality of food, different location, or
  different level of service, etc.
Price     Demand curve of a Monopolistic competitive firm
                                 A perfectly competitive firm has a
                                 perfectly elastic demand curve
                                 1) There are many other firms
                                 2) Each firm produces the exact
 P2
                                        SAME good
 P1                            d (perfect competitive firm)

                                d (monopolistic competitive firm)


                                quantity
  q2    q2        q1 = q1
With Monopolistic Competition there are many other sellers,
   but each firm produces a DIFFERENTIATED product.
Because it’s product is not a perfect substitute the monopolistic
competitor can raise price and still sell some of it’s product.
The monopolistic competitor’s ability to control the price of it’s
good occurs because it’s product is DIFFERENTIATED
instead of identical.
Price     Demand curve of a Monopolistic competitive firm



 P2
 P1                            d (perfect competitive firm)

                                d (monopolistic competitive firm)

                          D (monopoly)
                                quantity
  q2     q2    q2 q1 = q1=
A Monopolist  has controlq1over it’s price because it is the market
and it had no substitutes.
A monopolistic competitor is but one among many firms and
those firms produce closely related products….
….Because of this, a monopolistic competitor’s demand curve
will be more elastic than a monopolist’s.
    More elastic: more competition and more substitutes
Price     Demand curve of a Monopolistic competitive firm
                The demand curve represents the market share
                that the firm enjoys relative to the total market.


                                   d (increase in market share)

                                  d (monopolistic competitive firm)

                                 d (decrease in market share)

                                   quantity

  If this firm gains market share that is represented as an
   increase in demand.
  If this firm loses market share that is represented as a
  decrease in demand.
Monopolistic Competition:
 Short run to Long Run
 Price                        M                What if d1 is the
                                               Suppose market
                              C     ATC        demand curve for this
                                               share were lower?
                                          firm...
$20                                      The demand curve
                                          …this Monopolistic
$18                                      would be lower…will
                                          Competitive firm
ATC                               AVC
$17
$16                                          able to make an
                                          be…and the firm
                                      d1
                                          Economic profit
                                             would make an
                                                 economic loss.
                                   d2
                                  MR1
                        MR2
              q2   q1               quantity
•In the short run, a monopolistic competitive firm can make an
economic profit, economic loss, or normal profit(not shown)
•How much profit will depend on the relative market
share(demand curve) and the cost of production.
         What will happen in the long run?
 Price                      M                 What will happen in
                            C     ATC           the long run?
                                            A firm making economic profit
$20
PLR                                           Firms stop entering
ATC                                           when economic profit
=
$17
ATC                                           in the industry is zero
                                       d1
                                 dLR

                                MR1
                     MRLR
              qLR q1              quantity
If firms are making economic profit, potential new firms(that
can produce with the same costs) will see the opportunity to
make profit and enter the industry
By doing so they take away market share from existing
firms and their demand curves shift to the left (decrease).
 Price                       M                    What will happen in
                             C         ATC        the long run if firms
                                                  are making economic
                                                  losses?
PLR
$18                                          A firm making an economic loss
=                                AVC          Firms stop entering
ATC
$15                                           when economic losses
                                              are eliminated(Earning
                                              Normal Profit)
                                      dLR

                                 d2
                    MRMRLR
                      2

             qqLR
              2
                                       quantity

If firms are making economic losses, some firms will exit the
industry to do better (an industry “shake out”).
As firms exit the industry the remaining firms gain market
share, which shifts their demand curves to the right(increase)
 Price     Minimum ATC     M                Long Run Equilibrium
            (Capacity)     C     ATC        It is most likely that
                                            monopolistic
PLR                                         competitive firms will
=                                           only make a
ATC                                         NORMAL PROFIT
                                            (P = ATC).
                                dLR          This is similar to
MCLR                                         Perfect Competition
                    MRLR
              qLR    q: capacity quantity
Price > MC Price > minimum AC (Similar to Monopoly)
Compared to Perfect Competition, Monopolistic competition is
neither Allocative or Productively efficient.
Level of output is less than where AC is minimized. This is
referred to as EXCESS CAPACITY.
Based on efficiency, the Consumer is not as well off as under
perfect competition.          But is this REALLY true?
 Price     Minimum ATC      M            Is the Consumer worse
            (Capacity)      C    ATC off in Monopolistic
                                         Competition?
                                      It depends how
PLR                                   consumers feel about
=                               dpc having a variety of goods
ATC                                   to consume...
                                   If value to consumers of
                                dLRhaving a variety of goods >
MCLR                               (Pmc > Ppc) , then consumers
                                   could be better off in
                     MRLR          monopolistic competition
              qLR     q: capacity quantity
The only way to reach minimum ATC is if the demand curve
faced by the firm is perfectly elastic (only true in perfect
competition)
The reason for the downward sloping demand curve in
monopolistic competition is because of Product Differentiation.
Pmc > Ppc , but if consumers value variety in goods and services
perhaps they are willing to pay the difference.
   Monopolistic Competition &
Non-Price competition between firms
• Because product differentiation exists in
   monopolistic competition, firms need to make their
   product distinct from their competitors...
…they do this though advertising
   (non-price competition)
• By doing this they are able to increase market share
   and able to raise price without losing as many
   customers(decrease their price elasticity).
• Advertising leads to additional costs above
   production costs, which are called...
...Selling costs: the cost incurred by a firm to influence
   the sales of it’s product.
• This raises the total cost of the product, which the
   consumer will pay for.
 Price                     M
                           C    ATC (with Selling Costs)

PLR                             ATC(without Selling Costs)




                               dLR           Selling Costs
                                                  and
                                             Monopolistic
                    MRLR                     Competition
              qLR q: capacity quantity
The light blue ATC curve could exist under perfect
competition (no selling costs)
This makes the difference between Pmc > Ppc even larger.
If the consumer values variety enough, they may still be
better off with selling costs than under perfect competition
              Examples of Oligopolies
       Percent of value of shipment of product
     Industry                  four       eight     # of firms
Cigarettes                        98.9      100          9
Chewing Gum                       96
Household Laundry equipment 90              99          10
Beer                              90        95         494
Electric Lamp bulbs               89.7      94.1         54
Cereal breakfast foods            86.7       94.7        48
Motor vehicles                    83         92         325
Household refrigerators & freezers 82.8      97.6        21
Credit Card Issuing               75.8      87.0        610
College Bookstores                 69.5     73.9       1,839
Motorcycles                       63.9       74.7       373
Dog and Cat Food                  63.4      83.2         129
Soft Drinks                        47.2     58.8         388
                     Oligopoly
          Assumptions or characteristics
1. A few large firms that dominate total market share.
2.        Can produce a standardized or
             differentiated product
3. High barriers to entry...
  a)Economies of scale that give cost advantages to
      existing (large) firms
  b)Large set-up costs for a large firm can prevent entry
       Costs of raising a large sum of money to buy
          capital goods and equipment up front.
Usually, this equipment is specialized for that particular
  industry...
…which means they are “Sunk” costs…
…costs that cannot be recovered upon exit of the
  industry. Once incurred, you have them even if you fail
  c) The “cost” of establishing a brand name.
                  Oligopoly
      Implications of above assumptions:
Firms are interdependent...
  An Oligopolists’ control over price comes from the
  few amount of sellers in the industry and large
  market share of each firm…
…this means every time a firm changes price,
  quantity, or engages in non-price
  competition(advertising) to gain market share or
  revenue...
  ...it must be at the expense of other firms market
  share or revenue in that industry.
                   Oligopoly
• Other firms must respond to changes in the price,
  quantity, or non-price competition of it’s rival firms
  to try to prevent the loss in market share or
  revenue...
…each firm is aware of each other because decisions
  made by rival firms can hurt the profitability of
  other firms.
• Unlike the other 3 market structures, many types of
  behavior are possible with Oligopoly.
Different oligopolistic industries behave differently...
…some oligopolies compete fiercely with each other
  while some oligopolies cooperate with one another...
…by cooperate...Do NOT change prices to take away
  market share of other firms (make more profit
  together)
                  Oligopoly
 Oligopolist’s dilemma: Cooperate or Compete
• Although there are more than a few models on
  oligopoly behavior, they can be divided into two
  categories based on the Oligopolist’s dilemma.
        Models where firms compete
        Models where firms cooperate
Price A single firm in the Industry     Kinked Demand
    Suppose that firms have already established an equilibrium
                                        Curve
    price for their product           Firms in this industry are
          D2 (rival firms don’t match interested in maintaining or
          price increases; elastic)
                                      gaining market share (from
 P*
                                      other firms)
                                       What would the demand
                                       curve look like for a firm in
                                       such an industry?


                              D1(rival firms match price cuts;inelastic)
                  q*           quantity of chewing gum
• If this firm were to cut price (from P*), other firms must
  also cut price to avoid losing market share...
…this firm would gain little additional sales (Inelastic demand)
If this firm were to raise price (from P*), other firms would
keep their price the same (to get customers from this firm)...
...this firm would lose a lot of sales to it’s rival firms (elastic demand)
Price   A single firm in the Industry       Kinked Demand
                                            Two implications can
                                            Curve
                                            be found in this model:
                             If Pd < 1 TR decreases as P decreases
P*
                             If Pd > 1 TR decreases as P increases


                                Helps to explain why prices don’t
                                change often in some oligopolies


                 q*           quantity of chewing gum
1) This firm has no incentive to change price from the original price.
  Any change in price will cause total revenue would decline
2) Costs of production may rise (MC2 > MC1), but the firm may
still keep the same price and quantity.
            Contestable markets
 A contestable market occurs when:
a) Entry is relatively easy and exit has low
  cost because...
…firms exiting the industry can dispose of assets by
 selling them elsewhere.
 The set-up or “sunk” costs that are usual barriers to
 entry for an oligopoly are “recoverable” in a
 contestable market.
b) New firms can produce product at same
  cost as existing firms.
Examples: Trucking, airline service at small airports
Price
                                      Contestable Markets
                   MC

                        ATC
PM                                 Firms in an industry that don’t
                                   have to worry about entry will
                                   maximize profits(MR=MC)
                                   and charge the highest price
                                   they can (PM)
              MR         D

         qM             quantity



        Firms will behave much like a Monopoly
Price                                 Price
                                              Contestable Markets
                          MC
                                                                MC
                                ATC
PM                                                                    ATC




                    MR            D

               qM                quantity                             quantity
                                               A potential New firm
An Existing firm in a Contestable market
If the market is contestable, then firms in the industry face the
possible entry of new firms with the SAME COSTS.
If existing firms keep the price PM , this will encourage the
potential new firms to enter (because they would make
economic profit)
Price                                 Price
                         MC                   Contestable Markets
                                                                MC
                                ATC
PM                                                                    ATC

PC
                                      P = Minimum ATC


                    MR            D

               qM                quantity                             quantity
                                               A potential New firm
An Existing firm in a Contestable market
To prevent the entry of the potential new firms, Existing firms
will be forced to charge a lower price (and produce more output).
The only price that can keep new firms from entering would be
very close to minimum ATC or competitive price (PC).
At that price no potential firm would enter because they could
only earn normal profit (only as well as current alternative)
         Implications of Contestable
               Market theory
1. A small number of firms does not always imply a
   lack of a competitive outcome...
…firms in contestable markets may make close to or
   only a normal profit...
…if markets are contestable, an industry with few
   firms may come close to the
   perfectly competitive outcome (P = MC = Min ATC)
2. Inefficient firms cannot survive because they can’t
   keep price low enough to prevent entry into the
   industry.
  If an existing firms costs are higher than a potential
   new firm, that firm will fail.
  It is the threat of entry(and not the actual entry) that
   keeps a contestable market competitive
 Price leadership theory : tacit collusion
• The industry usually has one dominant firm and
   then a handful of smaller firms that would compete
   against one another.
   The dominant firm sets it’s price to maximize it’s
   profits...
…the other firms follow by setting their prices close to
   (or equal) to the dominant firms price.
   Example: Most large airports are dominated by one
   airline...
...when that airline raises fares, the other airlines
   usually follow.
 Price leadership theory : tacit collusion
 Why would the smaller firms follow the dominant firm?
 1) Fear retaliation of the dominant firm if they attempt
   to gain market share through cutting price.
Dominant firm could practice Predatory pricing...
...cutting price far enough below average costs to put
   rival firms out of business (illegal in the United States)
2) The smaller firms believe that the dominant firm has
   better information than they do about the industry.
    In the banking industry, small banks may follow
   interest rate changes by large banks
    Industries with equal size firms can use:
   Cost-Plus pricing...
   Firms charge a certain % above average costs.
    Since costs are virtually the same for all firms, prices
   will be too.
    Cartel theory: explicit collusion
A Cartel is a group of firms that act together to
   coordinate output decisions and control prices.
   In other words, act like a monopoly.
Conditions needed to establish and maintain a Cartel:
  1) Large barriers to entry and few good substitutes
…to prevent other sellers from entering at the high
   prices that the cartel will establish.
  2) Divide up the joint (monopoly) profit by...
...establishing quotas on the amount of output
   produced for each firm....
...so that the industry produces the monopoly output.
Or use Market segmentation....each firm gets a “part”
   of the market and that firm has the responsibility to
   enforce the cartel price in their part of the market.
Price
(per             3) Make sure that no firm exceeds their quota
barrel)   A single firm in the cartel     Before a cartel is formed the
                                MC         price of oil would be $25
                                        ATC This also happens to be
$100                                          the competitive price...
                                              …so this firm initially
                                              produces the
 $25                                          competitive output at q1


           qquota      q1               quantity of oil
• Suppose firms in this industry then form a cartel and set a
  price to maximize joint monopoly profits.
  The only way this price can be maintained is if ALL FIRMS
              produce only their output QUOTA
   This firm will now make economic profit (green area)
Price
(per             3) Make sure that no firm exceeds their quota
barrel)   A single firm in the cartel        This firm (and all other
                                MC           firms in the cartel) will
                                         ATC continue to make
$100                                         economic profit if they
                                             ALL stay within their
                                             quotas
                                        …but each firm in the cartel has
                                         an incentive to cheat to gain
                                           greater economic profit
           qquota     q1 qcheat          quantity of oil
But this firm(as well as other cartel firms) is NOT maximizing
                  profits at the price of $100.
This firm can make EVEN MORE PROFIT by cheating on it’s
production quota and adding the Peach area to profit(P=MC)
  This increase in profit can only work if IT IS THE ONLY
      FIRM that cheats (So market price stays at $100)...
Price
(per             3) Make sure that no firm exceeds their quota
barrel)   A single firm in the cartel        …but each firm in the
                                MC           cartel has an incentive to
                                        ATC cheat to gain greater
$100                                         economic profit
                                            Since all firms have the
                                            same incentive to cheat, it
 $25                                        is likely enough will cheat
                                            to vastly increase the
                                            supply of the good.
           qquota     q1 qcheat         quantity of oil
 If all firms cheat, the price declines back to competitive levels
          and firms end up making zero economic profit.
 Unless firms can find a way to prevent cheating on production
              quotas, collusion to raise prices will fail
 There is no legal way to prevent cheating, because cartels are
                 usually illegal in most countries
     Cartels are most successful if:
1)       There are very few firms:
            usually less than 5
2) Easy to detect quota violations
3) Entry barriers are very high
4) No anti-trust legislation in the country
                 Game theory
• In an oligopoly, firms are interdependent and must
  act and react to what rival firms will do.
• Game theory allows us to analyze the strategic
  interaction of firms that are interdependent
• Games consist of:
   1) Rules: How many players, players options, etc.
   2) Strategies: price changes, quantity changes,
      product changes, advertising changes, etc
   3) Payoffs: winning, profit
• Example: Cartel theory.....the dilemma of keeping
  your agreement (quota) or cheating.
Here is an example               Vanilla corporation
with two soft
drink firms:                Keep Quota          Cheat
                        1                  2

                Keep
                Quota
      Lemons
      Limited           3                  4


                Cheat


• Vanilla corp. and Lemons Ltd. are two firms that make up
  this soft drink industry.
• They have two strategies....1) enter into a cartel with the
  other firm and keep to the quota the maximizes the joint
  profit, or...
  2) break the agreement...cheat on the quota (which can
  make even more profit if the other firm does not cheat)
Here is an example                  Vanilla corporation
with two soft
drink firms:                Keep Quota                    Cheat
                        1                          2
                         Vanilla profit = $500,000 Vanilla profit = $900,000
                Keep
                Quota Lemon profit = $500,000 Lemon profit = $100,000
      Lemons
      Limited           3                          4

                        Vanilla profit = $100,000 Vanilla profit = $150,000
                Cheat
                        Lemon profit = $900,000 Lemon profit = $150,000

     If both firms keep the quota they split the joint profit of
        $1,000,000 (the intersection of keep quotas{Box 1})
  If one firm decides to cheat, while the other firm sticks to the
 quota, the cheating firm gains more profit at the expense of the
                      other firm (Box 2 and 3)
 If both firms cheat they end up with profits that are close to the
                      competitive level (Box 4)
Here is an example                  Vanilla corporation
with two soft
drink firms:                Keep Quota                    Cheat
                        1                          2
                         Vanilla profit = $500,000 Vanilla profit = $900,000
                Keep
                Quota Lemon profit = $500,000 Lemon profit = $100,000
      Lemons
      Limited           3                          4

                        Vanilla profit = $100,000 Vanilla profit = $150,000
                Cheat
                        Lemon profit = $900,000 Lemon profit = $150,000


 Question: Which strategy should each firm take in this game?
    Answer: It depends on how the game will be played!
Let’s start off by assuming that each firm only gets ONE SHOT
                       at choosing a strategy
       Each firm knows the payoffs that will be received.
     Each firm chooses a strategy at exactly the same time.
Game with no                            Vanilla corporation
communication
                                Keep Quota                    Cheat
before choosing             1                          2
strategy
                             Vanilla profit = $500,000 Vanilla profit = $900,000
                    Keep
                    Quota Lemon profit = $500,000 Lemon profit = $100,000
      Lemons
      Limited               3                          4

                            Vanilla profit = $100,000 Vanilla profit = $150,000
                    Cheat
                            Lemon profit = $900,000 Lemon profit = $150,000
For Vanilla corp:
If Lemons Ltd. keeps the quota, Vanilla does better if it cheats.
If Lemons Ltd. cheats, Vanilla also does better if it cheats.
   No matter the strategy Lemons Ltd chooses, Vanilla would
                  ALWAYS choose to CHEAT.
 Called a Dominant strategy...a strategy that is best no matter
                    what the opposition does
Game with no                          Vanilla corporation
communication
                              Keep Quota                    Cheat
before choosing           1                          2
strategy
                           Vanilla profit = $500,000 Vanilla profit = $900,000
                  Keep
                  Quota Lemon profit = $500,000 Lemon profit = $100,000
      Lemons
      Limited             3                          4

                          Vanilla profit = $100,000 Vanilla profit = $150,000
                  Cheat
                          Lemon profit = $900,000 Lemon profit = $150,000

Lemons Limited will face the same decisions and so will have a
              dominant strategy to cheat as well.
 Both firms in this ONE SHOT game will decide to cheat and
         end up in Box 4 with $150,000 in profit each.
  What if we could change the game so that each firm could
   communicate with one another before making a choice.
Game where firms                    Vanilla corporation
can communicate
before choosing             Keep Quota                    Cheat
                        1                          2
strategy
                         Vanilla profit = $500,000 Vanilla profit = $900,000
                Keep
                Quota Lemon profit = $500,000 Lemon profit = $100,000
      Lemons
      Limited           3                          4

                        Vanilla profit = $100,000 Vanilla profit = $150,000
                Cheat
                        Lemon profit = $900,000 Lemon profit = $150,000

  Since both firms make more profit in box 1 than box 4 they
  could both agree to keep the quota so both can be better off.
Dilemma: Once this cooperative decision is reached, each firm
    is tempted to cheat on the other firm to increase profit...
...and if one firm cheats, it is then in the other firms interest to
               cheat as well (End up back in Box 4)
Game where firms                   Vanilla corporation
can communicate
before choosing            Keep Quota                    Cheat
                       1                          2
strategy
                        Vanilla profit = $500,000 Vanilla profit = $900,000
               Keep
               Quota Lemon profit = $500,000 Lemon profit = $100,000
     Lemons
     Limited           3                          4

                       Vanilla profit = $100,000 Vanilla profit = $150,000
               Cheat
                       Lemon profit = $900,000 Lemon profit = $150,000

    But if both firms know that if they cheat the other will as
                               well…
...this could prevent the first firm NOT TO CHEAT in the first
                     place! (Will stay in Box 1)
   If cheating is easy to discover, then cooperative agreements
                     may be easier to maintain.
Here is an example:             Orange
An Entry - Deterrence
Game                            corporationCompetitive price
                            Monopoly
                        1   Price               2
             Enter &
             set Price Orange: Economic Loss    Orange: Economic Loss
             Below
             Orange’s Blue: Economic Profit Blue:       Economic Loss
Blue.com     Price
                        3                       4
               Not      Orange: Monopoly Profit Orange: Normal Profit
               Enter
                        Blue: Normal Profit     Blue:   Normal Profit

            Orange is the only firm in a contestable market
If Orange sets the monopoly price then Blue.com will undercut
that price, take the market and earn economic profit and leave
Orange with an Economic loss(Box 1)
If Orange sets the competitive price then Blue.com will not enter
because if they do they would have to charge below ATC and
make an economic loss. They stay out and make a Normal
Profit and so does Orange.
Here is an example:             Orange
An Entry - Deterrence
Game                            corporationCompetitive price
                            Monopoly
                        1   Price               2
           Enter &
           set Price Orange: Economic Loss      Orange: Economic Loss
           Below
           Orange’s Blue: Economic Profit Blue:         Economic Loss
Blue.com   Price
                        3                       4
              Not       Orange: Monopoly Profit Orange: Normal Profit
              Enter
                        Blue: Normal Profit     Blue:   Normal Profit

           Orange is the only firm in a contestable market
Orange has two choices: Box 1 or Box 4: To avoid an economic
loss they practice Limit Pricing - charging a price to keep
potential competitors out of the market: A MaxiMin strategy.
 Because of the threat of Potential Entry Orange can’t
      take advantage of it’s market dominance
           Case study in Oligopolies
    Soft - Drink industry
•   Nationally: Coke 35% Pepsi 29% Independents 28%
    Have battled for market share over the country,
    especially in those areas where the other has a greater
    market share.
•   Compete by advertising and by price
    Example: In 1988 Coke responded to Pepsi’s 6% market
    hare in Phoenix by selling six-packs for $0.59.
•   In 1986 Coke was set to buy Dr. Pepper, but the
    government prevented the merger.
•   Pepsi was set to buy 7-up at same time but after Coke
    was prevented from buying Dr. Pepper backed down.
•   Result: No change in market share and small
    independent firms still survive.
          Summary of Oligopoly
• Firms have an incentive to cooperate or collude in
  order to make large profits.
• Yet, each firm has an incentive to break their
  agreement to make even greater profit.
• There is a mix of oligopolies that cooperate and
  compete and therefore there is no one theory of
  oligopoly.
• Many oligopolies will produce at P > MC and
  P> AC and not be efficient.
• Firms will Advertise to establish a brand name to
  increase set-up costs.
• Advertising (non-price competition) is considered
  more friendly competition than changing the price
  of the good.

				
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