Page 366 - The Principle of Economics

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PART FIVE
FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY
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Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels that would prevail under competition.
The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual interest. The logic
of the prisoners’ dilemma applies in many situations, including arms races, advertising, common-resource problems, and oligopolies.
N Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. The application of these laws can be controversial, because some behavior that may seem to reduce competition may in fact have legitimate business purposes.
oligopoly and how cooperative the firms are. The story of the prisoners’ dilemma shows why oligopolies can fail to maintain cooperation, even when cooperation is in their best interest.
Policymakers regulate the behavior of oligopolists through the antitrust laws. The proper scope of these laws is the subject of ongoing controversy. Although price fixing among competing firms clearly reduces economic welfare and should be illegal, some business practices that appear to reduce competition may have le- gitimate if subtle purposes. As a result, policymakers need to be careful when they use the substantial powers of the antitrust laws to place limits on firm behavior.
Summary
oligopoly, p. 350
monopolistic competition, p. 350 collusion, p. 353
Key Concepts
cartel, p. 353
Nash equilibrium, p. 355 game theory, p. 358
Questions for Review
prisoners’ dilemma, p. 359 dominant strategy, p. 360
1. If a group of sellers could form a cartel, what quantity 5. and price would they try to set?
2. Compare the quantity and price of an oligopoly to those 6. of a monopoly.
3. Compare the quantity and price of an oligopoly to those 7.
What is the prisoners’ dilemma, and what does it have to do with oligopoly?
Give two examples other than oligopoly to show how the prisoners’ dilemma helps to explain behavior.
What kinds of behavior do the antitrust laws prohibit?
of a competitive market.
4. How does the number of firms in an oligopoly affect the outcome in its market?
8. What is resale price maintenance, and why is it controversial?