OLIGOPOLY AND MONOPOLISTIC COMPETITION

Up to now, we have covered two extreme types of markets. We covered perfect

competition with the highest degree of competition, then we covered monopoly with the lowest degree of competition. Now, we will cover oiigopoly and monopolistic competition. These two market types are in between two extremes: they show some
features of competition and some features of monopoly.

Otigopoly Definition: Oligopoiy is a market structure in which there are a few sellers
and they
selT

almost identical products. There are ba:riers to entry in oligopoly. Oligopoly

is characterizedby the tension between cooperation and self- interesl among these
sellers. For example, and share profits. But

if the oligopolist firms can cooperate, they can charge a high price if they cannot cooperate
and instead they compete because

of

following their own self-interest, then price goes down and profits decline. We will give
examples of this later.

Oligopoly Examples: crude oil (Kuwait,Iraq, Saudi Arabia, Venezuela, Kazakhstan,

Azerbeijan) , coke (Coca Cola, Pepsi, Cola Turka), GSM providers (Turkcell, Vodafone, Avea), inter-city bus transportation (between Istanbul & Denizli: Varan, Ulusoy,
Pamukkale, Kriseoglu), airline kavel (between Istanbul and Frankfurt: Turkish Airlines,
Pegasus,

...)

etc.

Monopolistic Competition Definition: Many firms sell products that are similar but not
identical. There is free entry and exit like perfect competition. But at the same time, there
is product differentiation. Product differentiation allows firms to charge a high price and

collect some profits.

Monopolistic Competition Examples: music CDs (every artist has a different CD),
movies (every film is different), computer games, restaurants, athletic apparel (adidas,
nike, umbro, Turkish brands), etc.

Two

dimensions: l-Number of lirms

2-Product differentiation
No No No
Yes

Perfect Competition: Many

Monopoly: Oligopoly:

One

A few

Monopolistic Comp.: Many

First Let us start with studying Oligopoly:

A DOUPOLY EXAMPLE: A duopoly is an oligopoly with two firms.

Consider a town in which only Fatih and Selim own water wells. Every day, they decide

separatelyhow much water to pump and sell.

Assume all costs of pumping water is zero, so that profits are equal to revenues. Total Cost, Marginal Cost are zero.

Table L shows the demand schedule for water in this town. There are several possible outcomes:

1-

If Fatih and Selim COMPETE

and pump as much as they can, perfect

competition applies, price of water drops to zero. This is equal to marginal cost, which is
also

zero @ : MC

0). This is a socially efficient outcome: it is desirable for the

society.

2behave

What if Fatih and Selim COOPERATE instead of competing? Then they can

like

a single

firm. They can keep output low and prices high so that they can

maximize their total profit. Then they would behave like a monopoly. They would prrmp
60 gallons together in total so that theymake the largest profits in total. This would not be socially efficient (P

$60

) 0:

MC),but it is good for Fatih and

Se1im. We call the

group of firms acting like a monopoly "a carte7". Of course, to maintain the cartel, the

firms must agree on how they split total output and profits. Say, they could agree to split production 30 and 30 gallons. Such an agreement is called a "collusion". Which outcome is going to be realized depends on the game played between Fatih and
Selim. Are they going to compete or cooperate? Is there an equilibrium of this game? Let us look at the game played between Fatih and Selim. Have you seen the movie

"Beautiful Mind" with Russell Crowe? He plays John Nash in the movie. John Nash has
found the concept of Nash Equilibrium. Now I will try to illustrate what a Nash

Equilibrium is.
Let us start by assuming they are currently pumping 30 gallons each. Question: Is this an equilibrium outcome? Does Fatih, for example, want to pump 30 glven that Selim pumps 30? Given Selim pumps 30 gallons, Fatih's incentives are:

If Fatih

pumps(gallons):

Price($): 60 50
40
30

Fatih's profit($):
1800

30 40
50 60 70

2000

2000
1800 1400

20