Chapter 16 Summary

Chapter 16 covered markets that are oligopolies--that is, markets that fall between perfect competition and monopoly. In general, these types of markets are known as imperfectly competitive. Another example of imperfect competition is monopolistic competition, which is when many firms sell similar but different products, such as books, movies, or computer games. In an oligopoly, since there are only a few sellers, each seller greatly impacts the others' prices and profits. In these markets, firms must constantly decide between cooperation and competition. An oligopoly with 2 members is known as a duopoly, and is the simplest type of oligopoly. Firms in an oligopoly can decide to work together to set production and pricing, which is called collusion. Firms that collude in an oligopolistic market are known as a cartel and would lead to a monopoly outcome. However, cartel agreements are prohibited by anti-trust laws. If the oligopolists work independently, they will tend to produce a higher quantity and sell at a lower price, earning a lower total profit than a monopoly would. This equilibrium reached by oligopolists consider the others' actions is named a Nash equilibrium. Because oligopolists must consider the actions of all other sellers, as the number of sellers increases, the market approaches perfect competition. Game theory, especially the prisoner's dilemma, can help explain and predict the behavior of firms in an oligopoly market and the tradeoff between competition and cooperation these firms face.