Premium PowerPoint Slides by Ron Cronovich 17 Oligopoly 과점 Economics P R I N C I P L E S O F N. Gregory Mankiw The textbook mentions the concentration ratio in the preceding chapter (Monopolistic Competition), in the introductory section that briefly describes the four major market structures. In the previous edition of the textbook, the Oligopoly chapter appeared before the Monopolistic Competition chapter and contained a brief discussion of the concentration ratio. I have left the concentration ratio here in the Oligopoly chapter and provide a table showing concentration ratios in major U.S. industries to help motivate the study of oligopoly. Mostly, students find this chapter to be of average difficulty. Some students, however, have a little extra trouble with the simple game theory concepts introduced in the chapter, such as understanding how to read a payoff matrix. I’ve included extra examples and an Active Learning exercise on this material, and there are more good exercises among the end-of-chapter problems and study guide. One of the extra examples is a prisoners dilemma example in which two candidates agree not to run TV ads attacking each other (the best outcome for society). Self-interest leads to a Nash equilibrium in which each candidate reneges (the worst outcome for society). Premium PowerPoint Slides by Ron Cronovich

In this chapter, look for the answers to these questions: What outcomes are possible under oligopoly? 과점시장에서는 어떤 결과가 도출될까? Why is it difficult for oligopoly firms to cooperate? 과점시장의 기업들은 왜 협력하기 어려울까? How are antitrust laws used to foster competition? 독점금지법(반독점법)은 어떻게 경쟁을 촉진시킬까? 1

Measuring Market Concentration 시장 집중도 측정 Concentration ratio: the percentage of the market’s total output supplied by its four largest firms. 시장집중도 비율(=시장지배율): 규모기준 상위 4개 기업에 의해 공급되는 생산량 합계의 비율 The higher the concentration ratio, the less competition. 집중도 비율이 높으면, 시장은 경쟁적이지 못하다 This chapter focuses on oligopoly, a market structure with high concentration ratios. 17장에서는 집중도가 매우 높은 시장 구조인 과점에 초점을 맞춘다. OLIGOPOLY 2

Concentration Ratios in Selected U.S. Industries Industry Concentration ratio Video game consoles 100% Tennis balls Credit cards 99% Batteries 94% Soft drinks 93% Web search engines 92% Breakfast cereal Cigarettes 89% Greeting cards 88% Beer 85% Cell phone service 82% Autos 79% Sources: U.S. Census Bureau (www.census.gov), Federal Trade Commission (www.ftc.gov), and various periodicals and microeconomics textbooks. 3

Oligopoly 과점 Oligopoly: a market structure in which only a few sellers offer similar or identical products. 과점: 소수의 판매자가 유사하거나 동질적인 제품을 공급하고 있는 시장구조 Strategic behavior in oligopoly: A firm’s decisions about P or Q can affect other firms and cause them to react. The firm will consider these reactions when making decisions. 과점에서의 전략적 행동: 한 기업의 생산량과 가격에 대한 결정은 다른 기업들에 영향을 줄 수 있고, 다른 기업들은 다시 대응전략을 취한다. 따라서 기업은 의사결정을 내릴 때 이러한 연쇄반응을 고려하게 된다. Game theory: the study of how people behave in strategic situations. 게임 이론: 사람들이 전략적인 상황에서 어떻게 행동하는지를 연구 OLIGOPOLY

EXAMPLE: Cell Phone Duopoly in Smalltown 작은마을의 휴대폰 복점기업 P Q $0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 Smalltown has 140 residents(주민 140명) The “good”: cell phone service with unlimited anytime minutes and free phone 재화: 공짜 폰과 시간 무제한 이동전화 서비스 Smalltown’s demand schedule Two firms: T-Mobile, Verizon (duopoly(복점): an oligopoly with two firms) Each firm’s costs: FC = $0, MC = $10 각 기업의 비용: 고정비용=$0, 한계비용=$10 (한계비용은 생산량 수준과 관계없이 $10 = 수평선 모습) To understand the behavior of oligopoly, we will consider an oligopoly with just two members – a duopoly. The textbook’s example (water) is simpler, because it uses zero marginal cost (as well as zero fixed cost). This is appropriate, because students will not have the instructor’s assistance when reading the textbook. But in class, with the instructor’s guidance, a slightly more complex example is appropriate. The added complexity in this example is non-zero marginal cost. (However, fixed costs are still zero.) Students probably think cell phones are more interesting than water, so they may like this example better than the one in the textbook. To keep the example manageably simple, we assume unlimited anytime minutes & free cell phone. Without either of these assumptions, then the “product” consumers buy would not have a single well-defined price, but the price would vary based on how many minutes the customer used, or what kind of phone the customer wanted with her service plan. Regarding the zero fixed cost assumption: This merely makes the math easier. As students will recall from Chapter 13, fixed costs are sunk costs and do not affect decisions or outcomes. OLIGOPOLY 5

EXAMPLE: Cell Phone Duopoly in Smalltown 50 45 60 40 70 35 80 30 90 25 100 20 110 15 120 10 130 5 140 $0 Q P 2,250 2,400 2,450 2,000 1,650 1,200 650 $0 Revenue 500 600 700 800 900 1,000 1,100 1,200 1,300 $1,400 Cost 1,750 1,800 1,600 1,350 1,000 550 –650 –1,400 Profit Competitive outcome: P = MC = $10 Q = 120 Profit = $0 Monopoly outcome: P = $40, Q = 60, Profit = $1,800 ( At Q=60, Increase in output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10 ) Before considering possible duopoly outcomes, we first review the competitive and monopoly outcomes. Competitive outcome: P = MC = $10 (remember, we are assuming MC is constant at $10/unit). At P = $10, market demand equals 120 units, which the two firms split. Economic profit is zero, as we learned in the chapter “Firms in Competitive Markets.” Monopoly outcome: A single firm would produce the quantity where economic profit is maximized. In this example, Q = 60. The firm would set P = $40, from the demand curve. It is true, in fact, that MR=MC at Q=60, even though the table does not provide sufficient detail to see this. But if a student asks about this, here is a response that might satisfy the student: We can estimate MR at Q=60 as follows: Increase output from 50 to 70, dR = $200, dQ=20, MR = dR/dQ = $200/20 = $10. OLIGOPOLY 6

EXAMPLE: Cell Phone Duopoly in Smalltown One possible duopoly outcome: collusion 한가지 가능한 복점시장의 결과: 담합 Collusion: an agreement among firms in a market about quantities to produce or prices to charge 담합: 시장에서 기업들 간에 생산량 또는 가격을 협의하여 결정 T-Mobile and Verizon could agree to each produce half of the monopoly output: 두 기업은 각자 독점 생산량의 절반씩을 생산하기로 합의할 수 있다 For each firm: Q = 30, P = $40, profits = $900 Cartel: a group of firms acting in unison, e.g., T-Mobile and Verizon in the outcome with collusion 카르텔: 담합행위에 참여한 기업들의 모임 OLIGOPOLY 7

A C T I V E L E A R N I N G 1 Collusion vs. self-interest A C T I V E L E A R N I N G 1 Collusion vs. self-interest P Q $0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 Duopoly outcome with collusion(두 기업 담합시 결과) : Each firm agrees to produce Q=30, earns profit = $900. 각 기업은 생산량을 30으로 하고, 이윤은 $900 취함 If T-Mobile reneges on the agreement and produces Q = 40, what happens to the market price? T-Mobile’s profits? 만약 티-모빌이 약속을 어기고 생산량을 40으로 늘이면, 시장가격은 어떻게 되며, 티-모빌 이윤은 얼마? Is it in T-Mobile’s interest to renege on the agreement? 그때 이윤은 티-모빌이 약속을 어길 만한 정도인가? If both firms renege and produce Q = 40, determine each firm’s profits. 만약 두 기업 모두 40을 생산하면, 각 기업의 이윤은? This exercise leads students to discover that each firm has an incentive to cheat on the agreement, causing a breakdown of the profit-maximizing cartel outcome. 8

A C T I V E L E A R N I N G 1 Answers A C T I V E L E A R N I N G 1 Answers If both firms stick to agreement, each firm’s profit = $900 두 기업 모두 약속을 지키면, 각각의 이윤은 $900 If T-Mobile reneges on agreement and produces Q = 40: 만약 티-모빌이 약속을 어기고 40을 생산하면, Market quantity = 70, P = $35 T-Mobile’s profit = 40 x ($35 – 10) = $1000 T-Mobile’s profits are higher if it reneges. 약속을 위반할 경우 티-모빌의 이윤은 더 커짐 Verizon will conclude the same, so both firms renege, each produces Q = 40: 베리존 도 똑같이 결정하고, 결국 두 기업 모두 약속위반하고 40씩 생산 Market quantity = 80, P = $30 Each firm’s profit = 40 x ($30 – 10) = $800 (* 만약 베리존이 Q=30을 유지한다면, 이윤은 750이 됨) P Q $0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 9

Collusion vs. Self-Interest 담합 과 이기적 행동 Both firms would be better off if both stick to the cartel agreement. 만약 두 기업이 카르텔 약속을 지켰더라면 이윤은 더 커졌을 것임 But each firm has incentive to renege on the agreement. 그러나 각자 기업은 약속을 위반하려고 하는 동기를 가지게 됨 Lesson (교훈): It is difficult for oligopoly firms to form cartels and honor their agreements. 이런 이유로 과점기업들은 카르텔을 결성해서 신의를 가지고 약속을 지켜나가기가 어렵다 OLIGOPOLY 10

A C T I V E L E A R N I N G 2 The oligopoly equilibrium A C T I V E L E A R N I N G 2 The oligopoly equilibrium P Q $0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 If each firm produces Q = 40, market quantity = 80 P = $30 each firm’s profit = $800 Is it in T-Mobile’s interest to increase its output further, to Q = 50? Is it in Verizon’s interest to increase its output to Q = 50? This exercise shows students that Q = 40 is the profit-maximizing output for each firm. In the previous exercise, students were instructed to find the new market price – an important intermediate step – before determining the effect on profit. In this exercise, the instructions do not ask students to determine the effect on market price. The intention is to see if they will remember to do this critical intermediate step themselves. 11

A C T I V E L E A R N I N G 2 Answers A C T I V E L E A R N I N G 2 Answers P Q $0 140 5 130 10 120 15 110 20 100 25 90 30 80 35 70 40 60 45 50 If each firm produces Q = 40, then each firm’s profit = $800. If T-Mobile increases output to Q = 50: Market quantity = 90, P = $25 T-Mobile’s profit = 50 x ($25 – 10) = $750 T-Mobile’s profits are higher at Q = 40 than at Q = 50. The same is true for Verizon. 12

The Equilibrium for an Oligopoly 과점시장의 균형 Nash equilibrium: a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen 내쉬균형: 참여자들이 다른 상대방의 전략을 주어진 것으로 전제하고, 이에 대하여 최선의 전략을 선택하여 형성된 균형상태 Our duopoly example has a Nash equilibrium in which each firm produces Q = 40. 앞의 복점 사례에서 각 기업이 40씩 공급할 것이고, 이는 내쉬균형이다 Given that Verizon produces Q = 40, T-Mobile’s best move is to produce Q = 40. 베리존이 40을 공급한다면, 티모빌은 40을 공급하는 것이 최선 Given that T-Mobile produces Q = 40, Verizon’s best move is to produce Q = 40. OLIGOPOLY 13

A Comparison of Market Outcomes 시장 결과 비교 When firms in an oligopoly individually choose production to maximize profit, 과점 기업들이 각기 이윤을 극대화하는 수준의 생산량을 정할 때, oligopoly Q is greater than monopoly Q but smaller than competitive Q. 경쟁시장 생산량(120) > 과점 생산량(80) > 독점 생산량(60) oligopoly P is greater than competitive P but less than monopoly P. 경쟁시장 가격 ($10) < 과점 가격($30) < 독점 가격 ($40) Our cell phone duopoly example demonstrates that the noncooperative oligopoly outcome falls in between the monopoly and competitive outcomes. OLIGOPOLY 14

The Output & Price Effects Increasing output has two effects on a firm’s profits: Output effect: If P > MC, selling more output raises profits. Price effect: Raising production increases market quantity, which reduces market price and reduces profit on all units sold. If output effect > price effect, the firm increases production. If price effect > output effect, the firm reduces production. OLIGOPOLY 15

The Size of the Oligopoly As the number of firms in the market increases, the price effect becomes smaller the oligopoly looks more and more like a competitive market P approaches MC the market quantity approaches the socially efficient quantity Example from the textbook: Suppose the U.S., Germany, and Japan each have two automakers: * Ford and GM in the U.S. * BMW and Mercedes in Germany * Honda and Toyota in Japan Without international trade in autos, each country has a duopoly. With international trade, the number of sellers competing with each other increases to six, which drives prices down toward marginal cost and increases the market quantity toward the socially efficient quantity. Another benefit of international trade: Trade increases the number of firms competing, increases Q, brings P closer to marginal cost OLIGOPOLY 16

Game Theory 게임이론 Game theory helps us understand oligopoly and other situations where “players” interact and behave strategically. 게임이론은 과점시장과 참여자들이 전략적으로 상호작용하는 상황을 이해하는데 도움을 준다 Dominant strategy: a strategy that is best for a player in a game regardless of the strategies chosen by the other players 우월전략: 상대방이 선택하는 전략과 상관없이 자기에게 유리한 전략 Prisoners’ dilemma: a “game” between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial 용의자 의 고민: 두 용의자가 협력하여 서로 유리한 결과를 얻을 수 있음에도 불구하고, 협조관계를 유지하는 것이 왜 어려운지 보여주는 게임상황 “Players” can be people, firms, countries, or other entities. A “game” is a situation in which players interact. A “strategy” is a decision or decision-plan chosen by a player, which takes into account the behavior and likely reactions of other players. OLIGOPOLY 17

Prisoners’ Dilemma Example 용의자의 고민 예 The police have caught Bonnie and Clyde, two suspected bank robbers, but only have enough evidence to imprison each for 1 year. 은행강도 용의자인 보니와 클라이드를 체포(심증만 있고 물증 없음). 그러나 1년형을 받게 할 다른 범죄에 대한 확실한 물증밖에 없는 상태 The police question each in separate rooms, offer each the following deal (다른 방에 분리해서 심문하면서 각자에게 다음의 제안을 함): If you confess and implicate your partner, you go free. 너가 자백하고 파트너가 연루되었음을 증언하면 너는 방면 If you do not confess but your partner implicates you, you get 20 years in prison. 너가 자백하지 않고 파트너가 너가 연루되었다고 증언하면 너 혼자 20년형을 받는다 If you both confess, each gets 8 years in prison. 둘 다 자백하면 각각 8년형을 받게 하겠다. SUGGESTION: Instead of showing this slide, ask for two volunteers to be your prisoners. You should pick two students that sit in different parts of the classroom, who are less likely to know each other. Tell them they will be playing bank robbers who have been caught. You are going to interrogate each one separately, like they do on police dramas (have any 20-year-olds heard of NYPD Blue?). Ask Student #2 to step out of the room for a few moments. Offer to Student #1 the deal described on this slide. Make a note of his or her choice, but do not write it on the board. Have Student #2 step into the room, and ask Student #1 to wait outside. Offer to Student #2 the deal described on this slide. Ask the class not to give any hints about the decision that Student #1 made. Make a note of Student #2’s choice. Invite Student #1 back into the room. Write down both of their choices on the board and reveal to each of them their fate. Hopefully, each student plays the “confess” strategy, so that the outcome of this role-play is the classic Prisoner’s Dilemma Nash Equilibrium. But even if the outcome is different, that’s okay. Ask each student to give the reasons for the strategy he or she chose. Explain why you would have expected both to play the “confess” strategy, and show the payoff matrix on the next slide. I’m telling you, students LOVE this. It takes a little longer to get through the material, but the material has much more impact then merely lecturing on the Bonnie and Clyde example. OLIGOPOLY 18

Prisoners’ Dilemma Example Confessing is the dominant strategy for both players. 둘에게 있어 자백하는 것이 우월전략 Nash equilibrium: both confess 내쉬균형 : 둘 다 자백 Bonnie’s decision Confess Remain silent Bonnie gets 8 years Bonnie gets 20 years Confess Clyde gets 8 years Clyde goes free Clyde’s decision This slide is animated carefully as follows: 1) If Clyde confesses, then Bonnie gets 8 years if she confesses or 20 years if she does not. 2) If Clyde remains silent, Bonnie goes free if she confesses or gets 1 year if she does not. At this point, it may be worth mentioning that Bonnie’s best move is to confess, regardless of Clyde’s decision – hence, “confess” is Bonnie’s dominant strategy. 3) If Bonnie confesses, Clyde gets 8 years if he confesses or 20 years if he does not. 4) If Bonnie remains silent, Clyde goes free if he confesses or gets 1 year if he does not. Regardless of Bonnie’s decision, Clyde’s best move is to confess. Both players have a dominant strategy of confessing. Bonnie goes free Bonnie gets 1 year Remain silent Clyde gets 20 years Clyde gets 1 year OLIGOPOLY 19

Prisoners’ Dilemma Example Outcome: Bonnie and Clyde both confess, each gets 8 years in prison. 결과: 둘 다 자백, 각각 8년 형 받음 Both would have been better off if both remained silent. 만약 둘 다 침묵했다면, 둘 다 더 나은 결과를 얻게 됨 But even if Bonnie and Clyde had agreed before being caught to remain silent, the logic of self-interest takes over and leads them to confess. 그러나 만약 둘 다 잡히기 전에 침묵을 지키자고 약속했더라도, (격리된 이후에)이기심의 논리는 둘 모두를 자백하는 쪽으로 몰고 갈 것이다 The prisoners’ dilemma illustrates why cooperation is so difficult even when it is in both players’ mutual interest. OLIGOPOLY 20

Oligopolies as a Prisoners’ Dilemma 용의자 고민과 과점 When oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in a prisoners’ dilemma. 과점기업들이 독점의 이윤을 얻고자 카르텔을 구성할 경우 그들은 용의자 고민 게임의 플레이어가 된다 Our earlier example: T-Mobile and Verizon are duopolists in Smalltown. The cartel outcome maximizes profits: Each firm agrees to serve Q = 30 customers. Here is the “payoff matrix(결과 표)” for this example… The term “payoff matrix” is fairly standard in microeconomics, so it may be worth mentioning to your students. However, the textbook does not use this term, so you may wish to delete it from this presentation. If so, please note that the term appears in two different places in this presentation – once on this slide, and once on the bottom of the slide containing the instructions for Active Learning 3. OLIGOPOLY 21

T-Mobile & Verizon in the Prisoners’ Dilemma Each firm’s dominant strategy: renege on agreement, produce Q = 40. 각자의 우월전략은 약속을 위반하고 판매량을 40으로 하는 것임 T-Mobile Q = 30 Q = 40 T-Mobile’s profit = $900 T-Mobile’s profit = $1000 Q = 30 Verizon’s profit = $900 Verizon’s profit = $750 Verizon T-Mobile’s profit = $750 T-Mobile’s profit = $800 Q = 40 Verizon’s profit = $1000 Verizon’s profit = $800 OLIGOPOLY 22

A C T I V E L E A R N I N G 3 The “fare wars (요금전쟁)” game The players: American Airlines and United Airlines The choice: cut fares by 50% or leave fares alone If both airlines cut fares, each airline’s profit = $400 million If neither airline cuts fares, each airline’s profit = $600 million If only one airline cuts its fares, its profit = $800 million the other airline’s profits = $200 million Draw the payoff matrix, find the Nash equilibrium. The title I have given this game (the “fare wars” game) might be too much of a hint about what happens in the Nash equilibrium. Feel free to change it to something like “airfare pricing strategies.” 23

A C T I V E L E A R N I N G 3 Answers A C T I V E L E A R N I N G 3 Answers Nash equilibrium: both firms cut fares American Airlines Cut fares Don’t cut fares $400 million $200 million Cut fares United Airlines $400 million $800 million $800 million $600 million Don’t cut fares $200 million $600 million 24

Other Examples of the Prisoners’ Dilemma Ad Wars Two firms spend millions on TV ads to steal business from each other. Each firm’s ad cancels out the effects of the other, and both firms’ profits fall by the cost of the ads. Organization of Petroleum Exporting Countries Member countries try to act like a cartel, agree to limit oil production to boost prices & profits. But agreements sometimes break down when individual countries renege. OPEC(석유 수출국들의 모임) 회원국들은 카르텔처럼 행동한다. 가격을 높이 받고 이윤을 크게 하려고 원유생산량을 제한하는데 협약했다. 그러나 회원국들이 약속을 지키지 않으면서(원유생산량을 늘임) 협약은 종종 지켜지지 않을 때가 많다 The first example, “ad wars,” is not mentioned in the textbook. An interesting note: When Congress banned cigarette advertising on television in 1971, cigarette manufacturers’ profits rose. Prior to the ban, cigarette companies were stuck in a Nash equilibrium in which all were spending heavily on TV ads to steal business from each other. The ban, in effect, forced cigarette manufacturers to switch to the cooperative outcome in which none advertises on TV. The next three examples (OPEC on this slide, arms race & common resources on the next slide) are discussed in much more detail in the textbook. Instead of covering these same examples in detail in this PowerPoint, I chose to present different examples, so that students who read the book still have a reason to attend class (and vice versa). However, it’s still useful to mention the book’s examples here, and briefly discuss them if you wish, so they will be familiar to students when students read the chapter. OLIGOPOLY 25

Other Examples of the Prisoners’ Dilemma Arms race between military superpowers (군사대국간의 군비경쟁) Each country would be better off if both disarm, but each has a dominant strategy of arming. (참고 armed robbery: 무장강도) Common resources All would be better off if everyone conserved common resources, but each person’s dominant strategy is overusing the resources. OLIGOPOLY 26

Prisoners’ Dilemma and Society’s Welfare The noncooperative oligopoly equilibrium Bad for oligopoly firms: prevents them from achieving monopoly profits Good for society: Q is closer to the socially efficient output P is closer to MC In other prisoners’ dilemmas, the inability to cooperate may reduce social welfare. e.g., arms race, overuse of common resources In the arms race “game,” each of the superpowers would be better off if they could cooperate and sign an agreement to disarm. But the logic of self-interest dictates that each country will arm itself to the teeth. As a result, both countries are worse off for two reasons: 1) The risk of nuclear annihilation is higher. 2) Resources consumed in the arms race could have been used elsewhere. The following slide presents another example in which the inability to cooperate reduces social welfare. OLIGOPOLY 27

Another Example: Negative Campaign Ads Election with two candidates, “R” and “D.” If R runs a negative ad attacking D, 3000 fewer people will vote for D: 1000 of these people vote for R, the rest abstain. If D runs a negative ad attacking R, R loses 3000 votes, D gains 1000, 2000 abstain. R and D agree to refrain from running attack ads. Will each one stick to the agreement? This slide and the two that follow work through an example that is especially topical during election years. It does not appear in the textbook, so it is not supported with Test Bank questions or Study Guide questions. Please feel free to omit it from your presentation. Yet, I encourage you to consider keeping this example. Students find it interesting: it explains why negative ads flood the airwaves prior to elections, and it explains the effects of these ads on society. OLIGOPOLY 28

Another Example: Negative Campaign Ads Each candidate’s dominant strategy: run attack ads. R’s decision Do not run attack ads (cooperate) Run attack ads (defect) no votes lost or gained R gains 1000 votes Do not run attack ads (cooperate) no votes lost or gained D loses 3000 votes D’s decision Understanding the payoffs: Mutual cooperation is the benchmark outcome: Payoffs in other cells are differences in votes received relative to the mutual cooperation outcome. (This does not mean that there is a tie in the mutual cooperation outcome or the mutual defection outcome. It means that the winner will be decided by factors other than whether attack ads run or not.) Consider R’s decision. R is better off defecting (running ads attacking D) whether D cooperates or defects. If D cooperates, R’s attack ads result in 1000 more votes for R and 3000 fewer votes for D. If D defects, R loses fewer votes if he runs the attack ad than if he cooperates. Hence, running attack ads is a dominant strategy for R. The payoffs here are symmetric, so defecting is also D’s dominant strategy. This game has a Nash equilibrium in which both candidates defect. This is why, in the real world, we see so many attack ads in the weeks leading up to an election. R loses 3000 votes R loses 2000 votes Run attack ads (defect) D gains 1000 votes D loses 2000 votes OLIGOPOLY 29

Another Example: Negative Campaign Ads Nash eq’m: both candidates run attack ads. Effects on election outcome: NONE. Each side’s ads cancel out the effects of the other side’s ads. Effects on society: NEGATIVE. Lower voter turnout, higher apathy about politics, less voter scrutiny of elected officials’ actions. This slide considers the effects of the attack ads on election outcomes and on social well-being. The negative impact on social well-being is like a negative externality: the “bystanders” are voters who are worse off as a result of the candidates’ actions. OLIGOPOLY 30

Why People Sometimes Cooperate 그러면 때때로 왜 협력할까 When the game is repeated many times, cooperation may be possible. 게임이 여러 차례 반복된다면, 협력도 가능하다 These strategies may lead to cooperation: If your rival reneges in one round, you renege in all subsequent rounds. “Tit-for-tat” Whatever your rival does in one round (whether renege or cooperate), you do in the following round. OLIGOPOLY 31

Public Policy Toward Oligopolies 과점에 대한 공공정책 Recall one of the Ten Principles from Chap.1: Governments can sometimes improve market outcomes. 정부는 때때로 시장의 결과를 개선시킬 수 있다 In oligopolies, production is too low and prices are too high, relative to the social optimum. 사회적 최적수준에 비하여 과점시장에서 생산량은 너무 낮고 가격은 너무 높다 Role for policymakers (정책입안자의 역할): Promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome. 경쟁을 촉진시켜 과점기업들이 협력하는 것을 막아 효율적인 결과에 가깝게 되도록 한다 OLIGOPOLY 32

Restraint of Trade and Antitrust Laws 거래제한과 독점금지법 Sherman Antitrust Act (1890): Forbids collusion between competitors( 경쟁기업간 담합금지) Clayton Antitrust Act (1914): Strengthened rights of individuals damaged by anticompetitive arrangements between firms 기업들간 반경쟁적인 행위로 피해를 본 개인들의 권리 (손해배상 청구권)를 더욱 강화 -> 피해액의 3배 보상 If you’re so inclined, this might be a good place to mention the infamous phone call in which Robert Crandall, CEO of American Airlines, tried to convince Braniff’s CEO Howard Putnam to raise fares 20%. If you can dig up a transcript of the conversation to read in class (try a simple Google search), students will find it interesting: it has lots of curse words. OLIGOPOLY 33

Controversies Over Antitrust Policy 독점금지법에 대한 논쟁 Most people agree that price-fixing agreements among competitors should be illegal. 대다수가 동의하는 부분; 경쟁기업들 간 담합하여 가격을 고정시키는 것은 불법이다 Some economists are concerned that policymakers go too far when using antitrust laws to stifle business practices that are not necessarily harmful, and may have legitimate objectives. 정부가 독점금지법을 통해 합법적인 목적의 그다지 해롭지 않은 기업의 행동까지 심하게 규제한다는 지적을 받는다 We consider three such practices… OLIGOPOLY 34

1. Resale Price Maintenance (“Fair Trade”) 재판매 가격유지(공정거래) Occurs when a manufacturer imposes lower limits on the prices retailers can charge. 이는 생산자가 소매점이 받을 수 있는 가격의 하한선을 부과하는 경우 Is often opposed because it appears to reduce competition at the retail level. 이는 종종 금지되는데, 소매점 간의 경쟁을 제한하는 것으로 보기 때문 (소비자권장가?) Yet, any market power the manufacturer has is at the wholesale level; manufacturers do not gain from restricting competition at the retail level. 하지만 생산자가 가지고 있는 시장지배력은 도매가격을 통해서 나타난다; 생산자는 소매점의 경쟁을 제한함으로써 얻는 이익이 없다 As I prepare this PowerPoint, I am shopping for a home theater sound system. My experience is relevant to this slide, and students have had similar experiences when shopping for stereo components, computers, or other products. I visited a local store to check out different brands and models. The salesperson at this store is very knowledgeable, and the store provided several comfortable, sound-proofed rooms where I could spend as much time as I wanted “auditioning” the various components without the intrusion of outside noise. Based on this shopping experience, I have selected a particular model made by Denon, a high-end brand that you really have to hear to appreciate. Now that I have decided on a brand and model, my incentive is to buy from a discount retailer. If I do, the discount retailer is, in effect, free-riding off of the full-service retailer I visited. If all consumers used the full-service retailers only for information, and then purchased from discount superstores, then full-service retailers would all go out of business. Denon knows this. They also know that consumers are less likely to choose their equipment over cheaper brands if consumers do not have the opportunity to hear how great Denon’s gear sounds. So, to prevent discount retailers from driving full-service retailers out of business, Denon engages in a variation of the “fair trade” practice discussed on this slide: Denon only honors its warranty if the consumer purchased the product from an “authorized retailer.” For a retailer to be “authorized,” it must agree to sell Denon’s products at prices not lower than Denon specifies. I can find unauthorized retailers who will sell me Denon gear at lower prices, but Denon’s practice of not honoring the warranty gives me an incentive to pay a few extra bucks to buy it from an “authorized” seller of Denon products. OLIGOPOLY 35

2. Predatory Pricing 약탈가격 설정 Occurs when a firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later. 이는 기업이 신규진입을 마고 경쟁자를 시장에서 내몰기 위해 가격을 너무 낮게 내리는 경우이다 ( 그리고 나중에는 독점가격을 메길 수 있다) Illegal under antitrust laws, but hard for the courts to determine when a price cut is predatory and when it is competitive & beneficial to consumers. 독점금지법에 의해 불법이다. 그러나 법원으로서는 어떤 경우가 약탈가격 설정이고, 어떤 경우가 소비자에게 유익한 경쟁가격 인하인지 판단하기가 어렵다 Regarding the last two points: Predatory pricing requires selling products below cost, generating losses. The firm must have deep pockets to sustain such losses and survive until its competitor leaves the market. Afterward, there is no guarantee that the economic profits from charging the monopoly price will make up for the losses sustained during the period of predatory pricing. Suppose a firm engages in predatory pricing and sustains deep losses for a period of time, but succeeds in driving its competitor out of business. Even then, the pressure is not off – a potential entrant may be standing by, ready to jump into the market to take a share of the monopoly profits the firm would otherwise enjoy all to itself. If so, then the firm is less likely to recover the losses it endures while it is engaging in predatory pricing. Economists have done a fair amount of research on predatory pricing, and there is not yet any consensus. Until there is, it might not be a good idea to prosecute predatory pricing under the antitrust laws. OLIGOPOLY 36

3. Tying 끼워 팔기 Occurs when a manufacturer bundles two products together and sells them for one price (예, MS including a browser with its operating system) 이는 생산자가 두 제품을 묶어서 하나의 가격에 판매하는 경우(예, MS사가 윈도우OS를 팔면서 익스플로러를 끼워넣는 경우) Critics argue that tying gives firms more market power by connecting weak products to strong ones. 비판자들은 끼워팔기 행위는 취약한 제품을 경쟁력이 높는 제품에 연결시킴으로써 기업의 시장지배력을 높인다고 주장 Others counter that tying cannot change market power: Buyers are not willing to pay more for two goods together than for the goods separately. 끼워팔기가 시장지배력을 변화시키지 못한다는 주장; 구매자는 두 제품을 따로 구입할 때 지불하는 가격보다 더 지불하지 않을 것이기 때문 Firms may use tying for price discrimination, which is not illegal 기업은 가격차별의 행위로써 끼워팔기를 활용. 이는 불법 아님 OLIGOPOLY 37

CONCLUSION Oligopolies can end up looking like monopolies or like competitive markets, depending on the number of firms and how cooperative they are. 과점시장은 몇 개의 기업이 있는지에 따라서 그리고 그들 관계가 얼마나 협조적인지에 따라 독점시장처럼 혹은 경쟁시장처럼 될 수 있음 The prisoners’ dilemma shows how difficult it is for firms to maintain cooperation, even when doing so is in their best interest. 용의자 고민 게임은 기업들이 협조관계를 유지하기가 얼마나 어려운지를 보여줌. 그렇게 하는 것이 매우 유익함에도 불구하고. Policymakers use the antitrust laws to regulate oligopolists’ behavior. The proper scope of these laws is the subject of ongoing controversy. 정부는 과점기업들의 행동을 규제하기 위해 독점금지법을 활용. 하지만 이 법이 적용되는 적절한 범위에 대해서는 논란이 많다 OLIGOPOLY 38

CHAPTER SUMMARY Oligopolists can maximize profits if they form a cartel and act like a monopolist. 과점기업들은 카르텔을 구성하여 독점기업처럼 행동할때 이윤을 극대화시킬 수 있음 Yet, self-interest leads each oligopolist to a higher quantity and lower price than under the monopoly outcome. 그럼에도, 이기심으로 인해 독점시장보다 더 낮은 가격과 더 많은 생산량이 나오는 결과가 도출된다 The larger the number of firms, the closer will be the quantity and price to the levels that would prevail under competition. 과점시장에 기업수가 많을수록 산출랴와 가격은 완전경쟁시장 수준에 가까워진다 39

CHAPTER SUMMARY The prisoners’ dilemma shows that self-interest can prevent people from cooperating, even when cooperation is in their mutual interest. The logic of the prisoners’ dilemma applies in many situations. 용의자 고민 모형은 두 용의자가 협조하는 것이 더 좋은 결과를 가져옴에도 불구하고, 이기심으로 인해 협조가 어려짐을 보여준다. 이 모형은 여러 상황에 응용적용될 수 있다 Policymakers use the antitrust laws to prevent oligopolies from engaging in anticompetitive behavior such as price-fixing. But the application of these laws is sometimes controversial. 정부는 과점기업들의 가격담합 등 경쟁제한 행위를 방지하기 위해 독점금지법을 사용한다. 그러나 때로는 이법의 적용이 논란이 되고 있다 40