• Oligopoly: a market structure in which only a few sellers offer similar or identical products.

• Game theory: the study of how people behave in strategic situations.

17-1 Markets with Only a Few Sellers

A Duopoly Example

• A duopoly is an oligopoly with two members. It's simple, unlike an oligopoly, which usually has 3 or more members, but both markets face similar problems.

Competition, Monopolies, and Cartels

• Collusion: an agreement among firms in a market about quantities to produce or prices to charge.

• Cartel: a group of firms acting in unison.

The Equilibrium for an Oligopoly

• Nash equilibrium: a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.

• Once firms choose the best production method in an oligopoly to maximize profit, greater production of the quantity of output is enacted, while the level produced by the monopoly is less, and less than what's produced under perfect competition.

How the Size of an Oligopoly Affects the Market Outcome

• The output effect tells us that since the price is higher than the marginal cost, selling an extra gallon of water at the going price will raise profit.

• The price effect will raise production, which will raise the total amount sold, lowering the prices of water and lowering the profit made from all the other gallons sold.

17-2 The Economics of Cooperation

• Prisoners' dilemma: a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

The Prisoners' Dilemma

• Prisoners can choose to confess or remain silent, resulting in a payoff matrix, which will determine how the prisoner(s) end up.

• Dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players.

Oligopolies as a Prisoners' Dilemma

• The Prisoners' Dilemma is similar to an oligopolist reaching an outcome in a monopoly.

• A monopolist's outcome aims to be rational, while an oligopolist is looking for incentives to cheat.

Other Examples of the Prisoners' Dilemma

• An arms-race game is where two countries’ safety and power are dependent upon its decision to arm and the decision made by the other country. Each country wants to have more arms than the other.

• Common resources are typically overused, allowing people to take advantage of them.

• By playing in their self-interest, two players are led to an inferior outcome.

The Prisoners' Dilemma and the Welfare of Society

• The noncooperative equilibrium is typically bad for the welfare of society.

• Oligopolists lacking cooperation when trying to maintain monopoly profits is seen as beneficial for the welfare of society. This allows police to convict more criminals.

Why People Sometimes Cooperate

• Often, people can solve the prisoners' dilemma by playing the game many times.

• Tit-for-tat is when a player begins cooperating but then does whatever the player did last time.

• "An eye for an eye, a tooth for a tooth."

17-3 Public Policy Toward Oligopolies

Restraint of Trade and the Antitrust Laws

• Common law is a common way that policy discourages cooperation.

• The Clayton Act (1914) strengthened antitrust laws.

Controversies over Antitrust Policy

• It's typically irrational for wholesalers to crave a high retail price. Resale price maintenance will encourage non-price competition.

• In predatory pricing, the price has to be below the average variable cost to drive other people out of the market. The predator experiences the highest losses.

17-4 Conclusion

• Self-interest pushes oligopolies towards competition, despite acting similar to monopolies.