Kinh tế học - Chapter 11: Challenge to market effectiveness 2: oligopolies

Chapter 11Challenge To Market Effectiveness 2:OligopoliesMcGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.1Learning ObjectivesWhat is oligopoly?What is the Prisoners’ Dilemma?How do oligopolistic firms find themselves in the pricing Prisoners’ Dilemma?How do oligopolists escape the pricing Prisoners’ Dilemma?How do colluding oligopolists harm a society?Why do oligopolists have incentives to innovate?How do antitrust laws affect the society? 11-22Oligopoly Oligopolistic markets are in between a monopoly (where there is just one firm) and perfect competition (where there are a large number of firms).Industry% of U.S. market controlled by four largest firms in the industryBreweries 90.5Cigarette manufacturing 95.3Electric lamp bulb and part manufacturing 89.6Light truck and utility vehicle manufacturing 96.7Guided missile and space vehicle manufacturing 95.311-33In The Quest Of An OligopolyAntitrust laws prevent firms colluding on price as well as monopolies from forming.An implicit agreement to raise prices: sending a clear but legal signal through consecutive change of price.The challenge of maintaining high prices: each firm has an incentive to cheat by undercutting the implicit agreement.The challenge of international competition.The attempts of product differentiation and complicated pricing.Incompatibility and lock-in.11-44Oligopoly Economists are not sure when oligopolistic firms will compete and when they will cooperate.There is no reliable theory that tells when oligopolists will succeed cooperation.Prisoners’ Dilemma refers to forces that thwart oligopolists’ efforts at cooperation.11-55Prisoners’ DilemmaTwo criminals are arrested. The only way to know they’re serious is to establish at least one of them has confessed.By separating them, the police create incentives for the prisoners to turn on each other.11-66Prisoners’ DilemmaStay SilentBenConfessAdam goes free.Ben is executed.Adam gets one year in prison.Ben gets one year in prison.Adam gets life in prison.Ben gets life in prison.Adam and Ben will end up here.Adam is executed.Ben goes free.ConfessStay SilentAdam In the Prisoners’ Dilemma game, each person is individually better off confessing. So if both Ben and Adam are rational and self-interested, they will both confess and spend their lives in prison. Adam and Ben both simultaneously decide whether to confess or stay silent. The two prisoners end up in the box corresponding to their choices. 11-77Prisoners’ DilemmaPrisoners’ Dilemma applies to many more groups.Generally, those stuck in the Prisoners’ Dilemma take an action that is either selfish or altruistic.Individually, each player is better off being selfish.Yet all players are better off if everyone is altruistic.11-88Athlete's Steroid Dilemma11-99The Pricing Prisoners’ DilemmaOligopolists are often in a Prisoners' Dilemma with respect to pricing.Each firm’s pricing actions affect the other firm.If the two firms play the game just once, they each have an incentive to charge low prices.11-1010Escaping the Prisoners’ Dilemma Through CollusionIf a Prisoners’ Dilemma is played repeatedly, the participants can sometimes successfully collude. Cartels: These are organizations of producers who explicitly collude to charge high prices.Organization of Petroleum Exporting Countries (OPEC)Criminal cartels11-1111Antitrust Laws and CollusionExplicit agreements to charge high prices is a violation of antitrust laws.A major purpose of antitrust laws is to keep firms in a pricing Prisoners’ Dilemma.Firms often have difficulty using implicit collusion to escape a pricing Prisoners’ Dilemma.Mistrust and greed can easily destroy implicit agreements to maintain high prices.11-1212Using “Pro-Consumer” Policies to Promote Collusion “Most favored customer” promise:Under this promise, the seller legally promises that the price the customer is paying is not higher than the price for any other customer. Price matching: The seller promises to match all its rival’s prices.“Most favored customer” and price matching can prevent firms from lowering prices.11-1313The Social Harm of CollusionBy the Law of Demand, when oligopolists maintain high prices, they reduce sales.When oligopolists collude, they raise prices above marginal costs.As a result, some consumers go without buying the good even when they value it higher than marginal costs.Colluding oligopolists reduce wealth of society.11-1414Escaping the Prisoners’ Dilemma Product differentiation:Firms resort to product differentiation when they cannot escape a pricing Prisoners’ Dilemma through collusion.When consumers base their choice on more than just price, oligopolists do not have the pressure to sell for the lowest price.Oligopolists sometimes use style rather than quality to differentiate their products. Advertising and brand names:Firms also have to inform consumers about the differences between their product and rivals’ products.11-1515Escaping the Prisoners’ Dilemma Using confusing prices:Complication reduces the damage of price competition.With complicated pricing, customers cannot easily discern which firm is charging less.Complicated pricing reduces the incentive for firms to cut prices as well as the harm to one firm of its rival’s price cut, e.g. long distance phone services, frequent-flyer programs of airlines.11-1616Oligopolies and InnovationOligopolies have greater incentives to innovate than any other type of firm.Firms in oligopoly face direct competition and so must innovate to survive.Oligopolies primarily engage in disruptive innovations.11-1717Disruptive Innovation in Oligopolies Disruptive innovation reduces the value of existing products or services.Firms are willing to develop innovations that harm rival firms but not themselves.Though disruptive innovation can reduce the value of individual firms, it usually increases the wealth of society by giving it better products.Example firms are Bell Telephone, Black & Decker, Charles Schwab, Dell computer, eBay, Expedia, Kodak, Linux.11-1818Prisoners’ Dilemma and Disruptive InnovationOligopolists sometimes collude to avoid disruptive innovation.Oligopoly firms benefit from colluding to reduce innovation expenditure.However, colluding to suppress innovation is far more dangerous than colluding to set high prices.11-1919Antitrust LawsAntitrust laws prohibit firms from colluding or attempting to acquire monopolies.They can reduce the deadweight loss caused by monopolies and oligopolies. However, antitrust laws are enacted and interpreted by imperfect government agent and hence can destroy society’s wealth.11-2020Antitrust Laws Beneficial antitrust enforcement: The United States v. Addyston Pipe and Steel Corporation,1899 National Society of Professional Engineers v. The United States,1978The courts ruled against eliminating price competition. Harmful antitrust rulings:The United States v. IBM Corporation, 1969 : The government dropped the case in 1982 but IBM had spent valuable resources fighting the government that it soon lost its dominance of the computer market.Predatory pricing11-2121Antitrust Laws and Predatory PricingAntitrust laws prevent predatory pricing.Predatory pricing litigation always seeks to punish firms when they charge low prices.According to predatory pricing theory, firms initially charge low prices to drive other firms out of their market. Then, when the predatory firm becomes a monopolist it raises prices, thereby damaging consumers. However, economists have never found any successful examples of predatory pricing.Some firms can be expected to return to the market when the predatory firm starts charging high prices.11-2222Do You Know?How do both criminals confess in the Prisoners’ Dilemma? Each person is individually better off confessing regardless of what the person does. So, each criminal confesses for his own good.How can oligopolistic collusion destroy wealth? When oligopolists collude, they maintain prices higher than marginal costs and reduce sales. Since some consumers go without buying the good, it destroys society’s wealth.11-2323Do You Know?Why do oligopolistic firms often try to differentiate their products? When consumers base their choice on more than just price, oligopolists do not have the pressure to sell for the lowest price. Hence, oligopolists try to convince consumers that their product is different from their rivals.Why do oligopolies have tremendous incentives to innovate? Oligopolistic firms face direct competition, so they must innovate to survive. They have greater incentive to innovate to differentiate their products from their rivals.11-2424Summary Oligopolistic markets are in between a monopoly and perfect competition.Through cooperation and collusion, oligopolists maintain high prices and increase profits.Oligopolists are often in a Prisoners' Dilemma with respect to pricing. where each firm’s pricing actions affect the other firms.Generally, those stuck in Prisoners’ Dilemma take an action that is either selfish or altruistic.Though each player is individually better off being selfish, all players are better off if everyone is altruistic.11-2525Summary Firms can cooperate and escape the pricing Prisoners' Dilemma by “most favored customer” and price matching.Product differentiation, advertising and brand names, and complicated pricing are the other ways to escape the pricing Prisoners' Dilemma.Colluding oligopolists reduce wealth of society.Oligopolies have greater incentives to innovate and primarily engage in disruptive innovations.Antitrust laws prohibit firms from colluding or attempting to acquire monopolies.11-2626Coming Up What are government imperfections?11-2727