Chapter 17

Chapter 17 covered oligopolies and how they worked. It was a pretty simple chapter, especially because it built off of the previous chapters, especially chapter 16. An oligopoly is a market with a few firms, where their actions and interactions affect each other, they are between a competitive and monopoly market, and the more firms there are, the more it acts like a competitive market, with price closer to marginal cost and quantity sold closer to the social benefit; self-interest prevents it from reaching a monopolistic profit. In a perfect world, the oligopoly will reach a monopolistic profit, where the firms maximize their profit, though it would not reach a socially beneficial quantity sold. Instead, the firms will reach, Nash equilibrium, where the economic actors interacting with one another each choose their best strategy given the strategies the others have chosen, due to the tension between cooperation and self-interest. There is also the prisoners’ dilemma, in which cooperation would benefit both parties, but self-interest and dominant strategy usually makes them choose a strategy in which both ultimately are worse off. In some instances, the “prisoners” don’t turn each other in and both receive the most efficient price, but this usually happens in players who do play more than once, learning that cooperation works best. In real life, due to regulation (the Sherman Act), even if firms were interested in cooperation and working it out so all parties could reach the maximized profit, it is difficult because they aren’t even allowed to discuss prices and quantity agreements.