Oligopoly

.title[
# Oligopoly
]
.subtitle[
## Microeconomics I
]
.author[
### Lyuben Ivanov, PhD
]
.institute[
### Sofia University St. Kliment Ohridski
]
.date[
### Fall Term 2025/2026
]

---

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  .font200[
<strong>  Introduction</strong>
]
<hr>

---

# Introduction

You have already learned:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-chevron-circle-right"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">why owning stock of a firm with significant market power and/or employment by such firm may be very lucrative</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-chevron-circle-right"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">how market power is determined by the number of firms and the existence of barriers to entry</td>
  </tr>
</table>

---

Now YOU are going to learn more about how having a low number of firms in an 
industry creates conditions for strategic behavior that may result in 
SUSTAINED abnormal profit.

---

# Market Structures Overview

---

# Oligopoly

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>oligopoly</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a market structure in which only a few sellers offer similar or identical products</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
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    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> sugar, tobacco products, gas distribution, oils and fats, confectionery, man-made 
fibres, coal extraction, soft-drinks and mineral waters, pesticides, weapons and 
ammunition in UK; beer, tennis balls, refrigerators, cars in USA </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> whether a market is an oligopoly or not is measured by its <it>concentration ratio</it> 
BUT there isn't a single clear-cut number to determine when a market becomes an oligopoly; </td>
  </tr>
</table>

---

# Play Time

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<br>

<div class="container">
    <div class="question">
        <p>The key feature of an oligopolistic market is that</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceA1" value="A">
        <label class="form-check-label" for="choiceA1">
            each firm produces a different product from other firms.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceB1" value="B">
        <label class="form-check-label" for="choiceB1">
            each firm takes the market price as given.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceC1" value="C">
        <label class="form-check-label" for="choiceC1">
            a small number of firms are acting strategically.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceD1" value="D">
        <label class="form-check-label" for="choiceD1">
            a single firm chooses a point on the market demand curve.
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('C', 'result1', 'choice1')">Submit</button>
    <div class="result" id="result1"></div>
  </div>

---

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  .font200[
<strong>  Markets With Only A Few Sellers</strong>
]
<hr>

---

# Duopoly

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>duopoly</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a market structure in which only two sellers offer similar or identical products</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> Pat and Pete are the owners of the only two water wells in a small village and 
each resident who wants water needs to pay one or the other for access to the well 
based on how much water he or she wants to use </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
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    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> this example is useful not because of its realism but for pedagogical reasons 
&mdash; the duopoly is the simplest market structure which illustrates the main 
features of oligopoly </td>
  </tr>
</table>

---

# Play Time: Demand For Water

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---

# Perfect Competition (FC=MC=0)

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<table>
<thead><tr>
<th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; background-color: rgba(250, 250, 250, 255) !important;" colspan="1"><div style="">Quantity</div></th>
<th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; background-color: rgba(250, 250, 250, 255) !important;" colspan="1"><div style="">Price</div></th>
<th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; background-color: rgba(250, 250, 250, 255) !important;" colspan="1"><div style="">Total profit</div></th>
<th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; background-color: rgba(250, 250, 250, 255) !important;" colspan="1"><div style="">Pat's profit</div></th>
<th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; background-color: rgba(250, 250, 250, 255) !important;" colspan="1"><div style="">Pete's profit</div></th>
</tr></thead>
<tbody>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 0 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 100 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 10 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 90 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 20 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 80 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 30 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 70 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 40 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 60 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 50 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 50 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 60 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 40 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 70 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 30 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 80 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 20 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 90 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> 10 </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;background-color: rgba(250, 250, 250, 255) !important;"> .can-edit[&nbsp;] </td>
  </tr>
  <tr>
   <td style="text-align:center;"> 100 </td>
   <td style="text-align:center;"> 0 </td>
   <td style="text-align:center;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;"> .can-edit[&nbsp;] </td>
   <td style="text-align:center;"> .can-edit[&nbsp;] </td>
  </tr>
</tbody>
</table>

---

# Cartel

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>cartel</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a group of firms acting in unison (colluding)</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> if Pat and Pete collude and agree to act as a monopoly they would maximize 
profits by limiting the amount of water they provide (hence rising the price they 
charge) acting as if they are a single monopoly firm </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> the tension between colluding oligopolists arises because they have to agree on 
how to split the sales/profits and how to ensure that no one cheats on the mutual 
agreement by selling more than their quota and/or lowering their price </td>
  </tr>
</table>

---

# Colluding Oligopolists (FC=MC=0)

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---

# Play Time

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<br>

<div class="container">
    <div class="question">
        <p>If an oligopolistic industry organizes itself as a cooperative cartel, it will 
produce a quantity of output ... ... the competitive level and ... ... the 
monopoly level.</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice6" id="choiceA6" value="A">
        <label class="form-check-label" for="choiceA6">
            less than; equal to
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice6" id="choiceB6" value="B">
        <label class="form-check-label" for="choiceB6">
            less than; more than
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice6" id="choiceC6" value="C">
        <label class="form-check-label" for="choiceC6">
            equal to; more than
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice6" id="choiceD6" value="D">
        <label class="form-check-label" for="choiceD6">
            more than; less than
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('A', 'result6', 'choice6')">Submit</button>
    <div class="result" id="result6"></div>
  </div>

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class: clear, middle, no-scribble
  
  .font200[
<strong>  The Economics of Cooperation</strong>
]
<hr>

---

# Game Theory

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>game theory</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">the study of how people behave in strategic situations</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> some real-world economic problems that are studied by game theorists are price 
wars, exploitation of common access resources, establishment of new technology, 
trade wars </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> despite game theory being developed for the needs of economics it has also been 
adopted in political science, biology and other fields where strategic, 
self-interested behavior is an important feature of the phenomena under 
consideration </td>
  </tr>
</table>

---

# Play Time

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<br>

<div class="container">
    <div class="question">
        <p>According to the definition of game theory, which of the following best describes 
its primary focus and application?</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceA2" value="A">
        <label class="form-check-label" for="choiceA2">
            It is the study of how people behave in strategic situations and is applied in 
fields such as economics, political science, and biology.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceB2" value="B">
        <label class="form-check-label" for="choiceB2">
            It is the study of individual decision-making in isolation where other people's 
actions have no impact.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceC2" value="C">
        <label class="form-check-label" for="choiceC2">
            It is a field of study used exclusively in economics to analyze price wars and 
trade agreements.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceD2" value="D">
        <label class="form-check-label" for="choiceD2">
            It is the study of how firms in perfectly competitive markets take prices as 
given by market conditions.
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('A', 'result2', 'choice2')">Submit</button>
    <div class="result" id="result2"></div>
  </div>

---

---

# The Prisoners' Dilemma

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>prisoners' dilemma</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a particular <i>game</i> between two captured prisoners that illustrates why 
cooperation is difficult to maintain even when it is mutually beneficial</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> the police have enough evidence to convict Bonnie and Clyde of the minor crime 
of carrying an unregistered gun, so that each would spend a year in jail, but  
the police lacks hard evidence to convict them of bank robbery (a major crime) so 
they need at least of them to confess it </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> this is similar to a duopoly where the two choices are to collude (deny) or 
compete (confess) </td>
  </tr>
</table>

---

# Play Time

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<br>

<div class="container">
    <div class="question">
        <p>In the context of the Prisoners' Dilemma involving Bonnie and Clyde, which action 
by the prisoners is equivalent to firms in a duopoly choosing to <i>collude</i>?</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice4" id="choiceA4" value="A">
        <label class="form-check-label" for="choiceA4">
            Both prisoners remaining silent (denying the robbery).
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice4" id="choiceB4" value="B">
        <label class="form-check-label" for="choiceB4">
            Both prisoners confessing to the robbery to get a lighter sentence.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice4" id="choiceC4" value="C">
        <label class="form-check-label" for="choiceC4">
            One prisoner confessing while the other remains silent.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice4" id="choiceD4" value="D">
        <label class="form-check-label" for="choiceD4">
            Both prisoners pleading guilty to the minor gun charge only.
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('A', 'result4', 'choice4')">Submit</button>
    <div class="result" id="result4"></div>
  </div>
  
---

# Dominant Strategy

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>dominant strategy</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a strategy that is best for a player in a game regardless of the strategies 
chosen by the other players</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> the dominant strategy for Bonnie is to confess if she suspects that Clyde will 
deny and to confess if she suspects that Clyde will confess </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> this particular example assumes that both Bonnie and Clyde only get utility from 
years spent out of jail (no moral or other considerations) and that this game 
will only be played once (they will never see each other again) </td>
  </tr>
</table>

---

# Play Time

<countdown-timer class="countdown inline no-controls" id="timer_64403faa" minutes="1" seconds="0" update-every="1" play-sound="true" tabindex="0" style="top:0;left:90%;--countdown-margin:5px;--countdown-font-size:1em;--countdown-border-width:0;--countdown-color-background:#23373B;--countdown-color-text:#FAFAFA;--countdown-color-running-background:#23373B;--countdown-color-finished-background:#23373B;--countdown-color-running-text:#BBCACEFF;--countdown-color-finished-text:#BBCACEFF;"></countdown-timer>

<br>

<div class="container">
    <div class="question">
        <p>In game theory, a 'dominant strategy' is best defined as:</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice5" id="choiceA5" value="A">
        <label class="form-check-label" for="choiceA5">
            the strategy that leads to the highest possible joint payoff for all players.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice5" id="choiceB5" value="B">
        <label class="form-check-label" for="choiceB5">
            a strategy that is best for a player regardless of the strategies chosen by the other players.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice5" id="choiceC5" value="C">
        <label class="form-check-label" for="choiceC5">
            a strategy that a player only chooses if they are certain the other player will cooperate.
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice5" id="choiceD5" value="D">
        <label class="form-check-label" for="choiceD5">
            the strategy that is chosen only when a game is played repeatedly over a long period.
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('B', 'result5', 'choice5')">Submit</button>
    <div class="result" id="result5"></div>
  </div>

---

# Play Time

<countdown-timer class="countdown inline no-controls" id="timer_5be4bc1e" minutes="1" seconds="0" update-every="1" play-sound="true" tabindex="0" style="top:0;left:90%;--countdown-margin:5px;--countdown-font-size:1em;--countdown-border-width:0;--countdown-color-background:#23373B;--countdown-color-text:#FAFAFA;--countdown-color-running-background:#23373B;--countdown-color-finished-background:#23373B;--countdown-color-running-text:#BBCACEFF;--countdown-color-finished-text:#BBCACEFF;"></countdown-timer>

.panelset.sideways.right[
.panel[.panel-name[Question]
<img src="prisoners-dilemma-question.png" style="width: 100%;">
]
.panel[.panel-name[Answer]
<img src="prisoners-dilemma-answer.png" style="width: 100%;">
]
]

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  The Application Of Game Theory<br>&nbsp;To Duopoly</strong>
]
<hr>

---

# PT: Dominant Srategies And Profits

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---

# PT: Dominant Srategies And Profits

<countdown-timer class="countdown inline no-controls" id="timer_98684d00" minutes="1" seconds="0" update-every="1" play-sound="true" tabindex="0" style="top:0;left:90%;--countdown-margin:5px;--countdown-font-size:1em;--countdown-border-width:0;--countdown-color-background:#23373B;--countdown-color-text:#FAFAFA;--countdown-color-running-background:#23373B;--countdown-color-finished-background:#23373B;--countdown-color-running-text:#BBCACEFF;--countdown-color-finished-text:#BBCACEFF;"></countdown-timer>

.panelset.sideways.right[
.panel[.panel-name[Question]
<img src="pat-pete-game-question.png" style="width: 100%;">
]
.panel[.panel-name[Answer]
<img src="pat-pete-game-answer.png" style="width: 100%;">
]
]

---

# Nash Equilibrium

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>Nash equilbrium</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">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</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> if Pat and Pete each compete by choosing a strategy based on the chosen strategy 
of the other water provider, Pat would provide not 25 liters but 35 liters expecting 
to lower the market price to $40 but increase her own profit from $1,250 to $1,400 </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> Pat's problem is that if Pete reasons the same way they will both end up worse off </td>
  </tr>
</table>

---

---

# Play Time

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<br>

<div class="container">
    <div class="question">
        <p>If an oligopoly does not cooperate and each firm chooses its own quantity, the industry will produce a quantity of output ... ... the perfectly competitive level and ... ... the monopoly level.</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice7" id="choiceA7" value="A">
        <label class="form-check-label" for="choiceA7">
            less than; equal to
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice7" id="choiceB7" value="B">
        <label class="form-check-label" for="choiceB7">
            less than; more than
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice7" id="choiceC7" value="C">
        <label class="form-check-label" for="choiceC7">
            equal to; more than
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice7" id="choiceD7" value="D">
        <label class="form-check-label" for="choiceD7">
            more than; less than
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('B', 'result7', 'choice7')">Submit</button>
    <div class="result" id="result7"></div>
  </div>

---

# Insights

The highly simplified analysis so far illustrates the tension between self-interest and cooperation in an oligopolistic market structure. The tension between colluding to realize monopoly profits as a whole and competing to increase individual profit at the expense of the other participants results in the following outcomes:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-lightbulb-o"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">the output produced by oligopolistic firms is less than the output that would be produced in a more competitive market structure but more than the output that would be produced if the market was monopoly;</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-lightbulb-o"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">the market price reached in an oligopolistic market is lower than the monopoly price but higher than a perfectly competitive price (the marginal cost of production).</td>
  </tr>
</table>

---

# The Size Of The Oligopoly Matters

At any time the participants in an oligopoly market have the option to increase output and in order to make the decision they have to weigh two conflicting effects on their profit:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 240px;"><b>The output effect:</b></td>
    <td> </td>
    <td> </td>
    <td>Because price is above marginal cost, selling one more unit of the product at the going price will raise the total profit.</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 240px;"><b>The price effect:&nbsp;</b></td>
    <td> </td>
    <td> </td>
    <td>Raising production will increase the total amount sold,
which will lower the market price, and hence the total profit from all the other
units sold.</td>
  </tr>
</table>

The more participants there are in the market, the more weight any individual participant would put on the output effect in their considerations!

---

# Play Time

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<div>
    <p>Firm A and firm B share a market where (at the current price) the PED is 
0.3. If both firms have equal share of the output and firm A decides to double its
output while firm B does nothing, by how much would the total output increase (in percentage terms)?</p>
</div>

<div style="position: relative; top: 300px">
    <input type="text" id="userAnswer1" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(50, 'result1', 'userAnswer1')" class="submit-button">Check</button>
</div>
<div id="result1"></div>

---

# Play Time

<countdown-timer class="countdown inline no-controls" id="timer_0d92868a" minutes="1" seconds="0" update-every="1" play-sound="true" tabindex="0" style="top:0;left:90%;--countdown-margin:5px;--countdown-font-size:1em;--countdown-border-width:0;--countdown-color-background:#23373B;--countdown-color-text:#FAFAFA;--countdown-color-running-background:#23373B;--countdown-color-finished-background:#23373B;--countdown-color-running-text:#BBCACEFF;--countdown-color-finished-text:#BBCACEFF;"></countdown-timer>

<div>
    <p>Firm A and firm B share a market where (at the current price) the PED is 
0.5. If both firms have equal share of the output and firm A decides to increase its
output by 20% while firm B does nothing, by how much would the price change (in percentage terms)?</p>
</div>

<div style="position: relative; top: 300px">
    <input type="text" id="userAnswer2" placeholder="Answer" class="input-field"><button onclick="checkAnswerO(-20, 'result2', 'userAnswer2')" class="submit-button">Check</button>
</div>
<div id="result2"></div>

---

# Insights

Based on the arguments above, we can conclude that as the number of sellers in an oligopoly grows, an oligopolistic market increasingly resembles a competitive market:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-lightbulb-o"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">the price lowers to approach the marginal cost of production;</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-lightbulb-o"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">the quantity produced increases to approach the socially efficient level of production.</td>
  </tr>
</table>

These two conclusions provide yet another perspective on international trade &mdash; allowing free trade increases the number of producers from which each consumer can choose, increasing competition and world output while lowering prices closer to the marginal costs of production.

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Public Policy and Oligopolies</strong>
]
<hr>

---

# Public Policies And Controversies

<br>

Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior 
that reduces competition (<i>price fixing</i>).

However, the application of these laws can be controversial, because some behavior that can appear to reduce competition  (<i>resale price maintenance, tying</i>) may in fact have legitimate business purposes.

Furthermore, sometimes the best way to achieve the most efficient outcome for society is to just enable more competition by removing trade barriers between countries.

---

# Questions?

<br>

</body>
</html>

---

# Thank You!

<br>

</body>
</html>