Due to similarities they exhibit, monopolistic competition and oligopoly are often lumped together in a general category – imperfect competition.

Why are there no supply curves for businesses in imperfectly competitive markets? A supply curve is only relevant when a business plans

how much output to produce at various prices A monopolistic competitor or oligopolist chooses one

output level then charges the highest price the demand allows at that quantity

6.3 Imperfect Competition

Recall: a kinked demand curve characterizes rivalry among competitors in an oligopoly This model helps clarify why oligopolists operating in

conditions of rivalry are reluctant to change price

Game Theory: Originally a field in mathematics, it analyzes how

mutually interdependent actors try to achieve their goals through the use of strategy – i.e. by choosing actions that take account of possible responses of other, in the same way that players in games such as chess do

Game Theory

A tool from game theory Shows how self-interested strategies can be self-

defeating Classic Example:

“Two partners in crime, Peter and Paul, have been caught and put in separate jail cells. Each is considering the choice they are given by police: (a) confess to the crime and agree to implicate their partner, or (b) stay silent”

The Prisoner’s Dilemma

2 businesses, A and B, who agree that they will both start to charge high prices

If one business breaks the agreement and charges a lower price, the other business will follow suit and thus they haven’t increased their total revenue

If both keep the agreement, they will both win, and their total revenues will substantially increase

Applying Prisoner’s Dilemma to Oligopoly

Businesses can’t act in a way that prevents or lessens competition. Practices include these below: Conspiracy – businesses conspire/agree to fix prices,

allocate markets or restrict entry to markets Bid-Rigging – companies that bid on contracts arrange

among themselves who will win each contract and at what price

Predatory Pricing – temporarily dropping prices below average to drive a new competitor out of business

Abuse of Dominant Position – make purchasers of a product sign long-term contracts to buy the product exclusively

Mergers – combining of 2 companies into 1 since it would substantially reduce competition

Anti-Combines Legislation in Canada

Horizontal Merger A combination of former competitors

Vertical Merger A combination of a business and its supplier

Conglomerate Merger A combination of businesses in unrelated industries

Mergers