Chapter 17/Oligopoly ❖ 313
c. The winning strategy, called “tit-for-tat,” occurred where a player would start out
cooperating and then do whatever the other player did during the previous time period.
forgives them if warranted.
V. Public Policy toward Oligopolies
1. The Sherman Act of 1890 elevated agreements among oligopolists from an unenforceable
contract to a criminal conspiracy.
2. The Clayton Act of 1914 strengthened the Sherman Act and allowed individuals the right to
trade.
3.
Case Study: An Illegal Phone Call
a. In the early 1980s, Howard Putnam, the president of Braniff Airways, taped a telephone
call from Robert Crandall, the president of American Airlines.
b. In the phone conversation, Crandall suggested to Putnam that they each raise their
fares.
c. Putnam turned the tape over to the Justice Department, which filed suit against Crandall.
B. Controversies over Antitrust Policy
2. Resale Price Maintenance
another.
b. Economists have argued that this policy has a legitimate goal. Customers often go to one
retailers.
3. Predatory Pricing
power.
b. This behavior is called
predatory pricing
.
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c. Economists doubt whether this strategy is used often, because it would mean that the
monopoly would have to sustain large losses. It is also difficult to expect that courts are
able to determine which price cuts are competitive and which are predatory.
4. Tying
b. Economists do not believe this to be a problem because people will not be willing to pay
more for two products sold together than they would be willing to pay for the goods
c. Instead, tying may simply be a form of price discrimination. Profits may rise if a firm
charges a combined price closer to the buyers’ total willingness to pay.
5.
Case Study: The Microsoft Case
b. A central issue in the case involved the tying of Microsoft’s Internet browser to its
Windows operating system.
d. In June 2000, the judge ordered that Microsoft be broken up into two companies, one
that sold the operating system and one that sold applications software. An appeals court
e. In September 2001, the Justice Department announced that it no longer sought a
breakup of the company and wanted to settle the case quickly. A settlement was reached
in November 2002.
lawsuits brought by the European Union.
6.
In the News: Should the N.C.A.A. Be Taken to Court?
violate antitrust laws.
b. This article from
The New York Times
recommends challenging the actions and decisions
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. If the members of an oligopoly could agree on a total quantity to produce, they would
Chapter 17/Oligopoly ❖ 315
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If the members of the oligopoly make production decisions individually, self-interest induces
them to produce a greater quantity than the monopoly quantity.
2. The prisoners’ dilemma is the story of two criminals suspected of committing a crime, in
which the sentence that each receives depends both on his or her decision to confess or
remain silent and on the decision made by the other. The following table shows the
prisoners’ choices:
Bonnie’s Decision
Confess
Remain Silent
Clyde’s
Decision
Confess
Bonnie gets eight years
Clyde gets eight years
Bonnie gets 20 years
Clyde goes free
Remain
Silent
Bonnie goes free
Clyde gets 20 years
Bonnie gets one year
Clyde gets one year
The prisoners’ dilemma teaches us that oligopolies have trouble maintaining the cooperative
outcome of low production, high prices, and monopoly profits because each oligopolist has
an incentive to cheat.
3. It is illegal for businesses to make an agreement about reducing output or raising prices.
maintenance.
Questions for Review
1. If a group of sellers could form a cartel, they would try to set quantity and price like a
2. Firms in an oligopoly produce a quantity of output that is greater than the level produced by
3. Firms in an oligopoly produce a quantity of output that is less than the level produced by a
price.
4. As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and
produced approaches the socially efficient level.
5. The prisoners’ dilemma is a game between two people or firms that illustrates why it is
agreement.
316 ❖ Chapter 17/Oligopoly
6. The arms race and common resources are some examples of how the prisoners’ dilemma
common resource, they would be better off sharing it. But, fearful that the other company
7. Antitrust laws prohibit firms from trying to monopolize a market. They are used to prevent
mergers that would lead to excessive market power in any firm and to keep oligopolists from
acting together in ways that would make the market less competitive.
Quick Check Multiple Choice
1. d
2. c
3. a
4. d
5. c
6. d
Problems and Applications
1. a. If there were many suppliers of diamonds, price would equal marginal cost ($1,000), so
the quantity would be 12,000.
b. With only one supplier of diamonds, quantity would be set where marginal cost equals
marginal revenue. The following table derives marginal revenue:
Price
Quantity
Total Revenue
Marginal Revenue
$8,000
5,000
$40,000,000
—-
7,000
6,000
42,000,000
2,000,000
6,000
7,000
42,000,000
0
5,000
8,000
40,000,000
–2,000,000
4,000
9,000
36,000,000
–4,000,000
3,000
10,000
30,000,000
–6,000,000
2,000
11,000
22,000,000
–8,000,000
1,000
12,000
12,000,000
–10,000,000
than marginal cost.
c. If Russia and South Africa formed a cartel, they would set price and quantity like a
monopolist, so the price would be $7,000 and the quantity would be 6,000. If they split
the market evenly, they would share total revenue of $42 million and costs of $6 million,
Chapter 17/Oligopoly ❖ 317
d. Cartel agreements are often not successful because each party has a strong incentive to
cheat to make more profit. In this case, each could increase profit by $2 million by
decline for both of them.
2. a. OPEC members were trying to reach an agreement to cut production so they could raise
the price.
increased production.
c. OPEC would like Norway and Britain to join their cartel so that they could act as a
monopoly.
b. The owners of baseball teams would like to keep players’ salaries low. This goal is
difficult to achieve because each team has an incentive to cheat on any agreement,
because they will be able to attract better players by offering higher salaries.
team from cheating.
4. a. If Mexico imposes low tariffs, then the United States is better off with high tariffs,
because it gets $30 billion with high tariffs and only $25 billion with low tariffs. If Mexico
imposes high tariffs, then the United States is better off with high tariffs, because it gets
a dominant strategy of high tariffs.
If the United States imposes low tariffs, then Mexico is better off with high tariffs,
because it gets $30 billion with high tariffs and only $25 billion with low tariffs. If the
United States imposes high tariffs, then Mexico is better off with high tariffs, because it
dominant strategy of high tariffs.
b. A Nash equilibrium is a situation in which economic actors interacting with one another
each choose their best strategy given the strategies others have chosen. The Nash
equilibrium in this case is for each country to have high tariffs.
d. The payoffs in the upper left and lower right parts of the box do reflect a nation’s
welfare. Trade is beneficial and tariffs are a barrier to trade. However, the payoffs in the
upper right and lower left parts of the box are not valid. A tariff hurts domestic
consumers and helps domestic producers, but total surplus declines, as we saw in
both
countries’ welfare will decline if they imposed high tariffs, whether or not the other
country had high or low tariffs.
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5. a. Synergy does not have a dominant strategy. If Synergy believes that Dynaco will go with
a large budget, it will also choose a large budget. However, if Synergy believes that
Dynaco will go with a small budget, it will want a small budget as well.
b. Yes, Dynaco has a dominant strategy of going with a large budget. It is the best
strategy for Dynaco to follow no matter what Synergy chooses.
c. The Nash equilibrium is that both firms will choose a large budget. Dynaco will follow its
6. a. The payoffs are:
Your Decision
Work
Shirk
Classmate’s
Decision
Work
You get 15 units of
happiness
Classmate gets 15
units of happiness
You get 30 units of
happiness
Classmate gets 5 units
of happiness
Shirk
You get 5 units of
happiness
Classmate gets 30
units of happiness
You get 10 units of
happiness
Classmate gets 10 units
of happiness
payoffs, so she will also shirk.
c. If you are likely to work with the same person again, you have a greater incentive to
work, so that your classmate will work, and you will both be better off. In repeated
games, cooperation is more likely.
d. The payoff matrix would become:
Your Decision
Work
Shirk
Classmate’s
Decision
Work
You get 15 units of
happiness
Classmate gets 55
units of happiness
You get 30 units of
happiness
Classmate gets 25 units
of happiness
Shirk
You get 5 units of
happiness
Classmate gets 50
units of happiness
You get 10 units of
happiness
Classmate gets 10 units
of happiness
Chapter 17/Oligopoly ❖ 319
this classmate to the first. However, she would prefer someone with a dominant strategy
of working as well so that she could get an A.
Braniff’s Decision
Low Price
High Price
American’s
Decision
Low
Price
Low profit for Braniff
Low profit for American
Very low profit for Braniff
High profit for American
High
Price
High profit for Braniff
Very low profit for American
Medium profit for Braniff
Medium profit for American
If American sets a low price, Braniff will set a low price. If American sets a high price,
Braniff will set a low price. So Braniff has a dominant strategy to set a low price.
Because both have a dominant strategy to set a low price, the Nash equilibrium is for
both to set a low price.
lower.
8. a. The playoff matrix for this game is:
Player One’s Decision
Take Drug
Don’t Take Drug
Player
Two’s
Decision
Take Drug
Player 1 gets 5,000 –
X
Player 2 gets 5,000 –
X
Player 1 gets 0
Player 2 gets 10,000 –
X
Don’t
Take Drug
Player 1 gets 10,000 –
X
Player 2 gets 0
Player 1 gets 5,000
Player 1 gets 5,000
5,000.
increases the payoff.
9. a. If Kona enters, Big Brew would want to maintain a high price. If Kona does not enter, Big
Brew would want to maintain a high price. Thus, Big Brew has a dominant strategy of
maintaining a high price.
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b. Because Big Brew has a dominant strategy of maintaining a high price, Kona should
enter. This is the only Nash equilibrium.
c. Little Kona should not believe this threat from Big Brew because it is not in Big Brew’s
interest to carry out the threat. If Little Kona enters, Big Brew can set a high price, in
should enter the market.
d. If the two firms could successfully collude, they would agree that Big Brew would
profit of $7 million.