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Oligopoly •Oligopoly A market structure in which a small number of interdependent firms compete. •The approach we use to analyze competition among oligopolists is called game theory. 1 LEARNING OBJECTIVE Oligopoly and Barriers to Entry • Barriers to Entry Barrier to entry Anything that keeps 13 - 1 new firms from entering an industry in Examples of Oligopolies in which firms are earning economic profits. Retail Trade and Manufacturing RETAIL TRADE MANUFACTURING INDUSTRY FOUR-FIRM INDUSTRY FOUR-FIRM CONCENTRATIO CONCENTRATIO N RATIO N RATIO Warehouse Clubs and 90% Cigarettes 99% Superstores Discount Department 88% Beer 90% Stores Hobby, Toy, and Game 70% Aircraft 85% Stores Radio, Television, and 62% Breakfast Cereal 83% Other Electronic Stores Athletic Footwear Stores 62% Automobiles 80% College Bookstores 58% Dog and Cat Food 58% Oligopoly and Barriers to Entry • Barriers to Entry 13 - 1 Economies of scale Economies of Economies of Scale Help scale exist when a firm’s long-run Determine the Extent of average costs fall as it increases Competition in an Industry output. Oligopoly and Barriers to Entry • Barriers to Entry In addition to economies of scale, other barriers to entry include: • Ownership of a key input • Government–Imposed Barriers • Patent The exclusive right to a product for a period of 20 years from the date the product was invented. 2 LEARNING OBJECTIVE Using Game Theory to Analyze Oligopoly Game theory The study of how people make decisions in situations where attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms. Key characteristics of all games: 1. Rules that determine what actions are allowable. 2. Strategies that players employ to attain their objectives in the game. 3. Payoffs that are the results of the interaction among the players’ strategies. Business strategy Actions taken by a business firm to achieve a goal, such as maximizing profits.
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