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Module 30 krugman 1
Module 30
Oligopoly
What’s New in the Fourth Edition?
• Handouts to use in class
• Updated cases
Module Objectives
• What is oligopoly and why does it occur?
• Why do oligopolists benefit from collusion and how are consumers hurt by it?
• Why is antitrust policy, policy that is aimed at preventing collusion among oligopolists, a critical
function of government?
Understanding Oligopoly
Creating Student Interest
• Ask students what they know about OPEC. Almost every student should have heard of OPEC and
should have some idea of its purpose. The current member countries are Algeria, Angola, Ecuador,
Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab
Presenting the Material
• Use Handout 30-1 to help your students understand oligopoly behavior.
Oligopoly in Practice
Creating Student Interest
• Ask students if they know of any cases where the Department of Justice has sued a company for
violating antitrust laws, or if they know of any cases where two companies wanted to merge and the
Presenting the Material
• Review the welfare effects of monopoly to help students understand why antitrust laws exist. Given
that explicit collusion is illegal and tacit collusion can be challenging, companies have an incentive
to differentiate their products so that they have more pricing power. Present the reasons why it can
Module 30 krugman 2
be challenging for an industry to tacitly collude and set high prices, and then brainstorm on strategies
for product differentiation.
Module Outline
Opening Example: The opening example deals with collusion Bridgestone and 25 other companies,
which pled guilty to price fixing in the market for rubber automotive parts. Collusion is illegal in the
United States, and these companies were caught red-handed. This example is used throughout the Module.
I. Understanding Oligopoly
A. A duopoly example
1. An oligopoly consisting of only two firms is a duopoly.
2. Sellers engage in collusion when they cooperate to raise each other’s profits. A cartel is
an agreement by several producers that increases their combined profits by telling each
one how much to produce.
B. Collusion and competition
1. In a duopoly, firms choose a level of output and sell that output at the market price.
2. Individual firms have an incentive to produce more than the quantity that maximizes
their joint profits because neither firm has as strong an incentive to limit its output as a
true monopolist would.
II. Oligopoly in Practice
A. The legal framework
1. Before 1890 in the United States, cartels were legal but legally unenforceable.
2. The Sherman Antitrust Act was passed in 1890; its goal was to prevent the creation of
monopolies and to break up existing ones.
a. One of the first actions taken under the Sherman Antitrust Act was the breakup of
Standard Oil.
B. Tacit collusion and price wars
Module 30 krugman 3
behave cooperatively.
b. Complex products and pricing schemes: In the real world, oligopolists produce many
products, which makes it difficult for a firm to track what its competitors are doing.
c. Differences in interests: Firms differ in what they perceive as fair and what strategies
are in their real interests.
Case Studies in the Text
Economics in Action
The Case Against Chocolate Producers Melts—This EIA discusses potential price fixing in the chocolate
industry.
Ask students the following questions:
1. What percentage of the chocolate market do the four largest firms control? (76%.)
2. By what percentage did chocolate candy prices increase from 2008 to 2010? (17%.)
3. How do chocolate producers explain the increase in the price of candy? (Producers claim
costs have risen.)
Web Resources
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Handout 30-1
Date_________ Name____________________________ Class________ Professor________________
Oligopoly Strategy
Price (per
pound)
Quantity
Total revenue
Marginal
revenue
$10
0
9
20
8
40
7
60
6
80
5
100
4
120
3
140
2
160
1
180
0
200
1. Calculate Total Revenue and Marginal Revenue in the table above.
2. What would be a monopoly firm’s optimal output? Price?
3. If two firms supply this market, and they agree to split the market evenly, what is the optimal output per
firm? Price?
4. Suppose one of the two firms decides to break the agreement and increase production by 20 from the
answer in number 3. What will be the price effect and the quantity effect for that firm? What happens
to the other firm?
5. What will firm 2 do to react to firm 1’s violation of the agreement?
6. What result occurs as the firms react to each other’s changes?
Module 30 krugman 5
Answers
Price (per pound)
Quantity
Total revenue
Marginal revenue
$10
0
1. Calculate Total Revenue and Marginal Revenue. (See table.)
2. What would be a monopoly firm’s optimal output if the marginal cost of production is 0? Price?
3. If two firms supply this market, and they agree to split the market evenly, what is the optimal output per
firm? Price?
4. Suppose one of the two firms decides to break the agreement and increase production by 20 from the
answer in number 3. What will be the price effect and the quantity effect for that firm? What happens
to the other firm?
5. What will firm 2 do to react to firm 1’s violation of the agreement?
Firm 2 will also increase output.
6. What result occurs as the firms react to each other’s changes?
