Communications Module 30 Homework Sherman Antitrust Act Was The Breakup Standard

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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

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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

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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?

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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?