Economics

Managerial Rule of Thumb

CHAPTERg MarketStructure:Oligopoly 253 #il

Coordinated Actions

Managers in oligopoly firms have an incentive to coordinate their actions, given the uncertainties

inherent in noncooperative behavior. Their ability to coordinate, however, is constrained by a coun-

try,s antitrust legislation, such as the prohibition on explicit cartels and the limits placed on many types

oitacit collusion in the United States. There are also incentives for cheating in coordinated behavior'

It is often the case that any type of behavior that moderates the competition among oligopoly firms is

likely to be of benefit to th; even if formal agreements are not reached. However, oligopolists, like all firms with market power, must remember that this power can be very fleeting, given the dynamic

and competitive nature of the market environment'

in this chapter, we have focused on the interdependent behavior of oligopoly firms

that ariseJ from the small nutnber of padicipants in these markets' Managers in

these flrms develop strategies basecl on their judgments about the strategies of their rivals and then adjust their own strategies in light of their rivals' actions. Because this tlpe of noncooperative beharrior can leavc all firms worse off than if they coordinoi".a tn"it actions, there are incentivcs for either expticit or tacit col- lgsion in oligopoly markets. trxplicit collusive agreements may be illegal and are always diffiCult to enforce. Many oligopolists tum to forrns of tacit colluslon, but

**ug"r" of these flrms must be aware that their actions may come under scrutiny from governmental legal and regulatory agenr:ies'

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cartel, p.245

cooperative oligopoly models, p. 237

dominant strate SY, P. 24O

game theory P.239 horizontal summation of marginal cost

curves, p.246

Exercises

joint profit maximization, P.245 kinked demand curve model, P.238 limit pricing, p.242

Nash equilibrium, P. 241

noncooperative oligoPolY models,

p.237

ghnical Questions he following graph shows a firm with a kinked

demand curve.

oligopoly, p.232 predatory pricing, p. 243

price leadershiP, P. 251

strategic entry deterrence, P.242 tacit coltusion , P.251

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a. What assumption lies behind the shape of this demand curve?

tr. Identifii the firm's profit-maximizing ou@ut and price.

c. Use the graph to explain why the firm's price is likely to remain the same, even if maxginal costs change.

and payoffs

Eanomics for Mar?agers, Third Edition, by Paul G. Famham. Published by Prentice Hail. Copyright @ 2014 by Pearson Education, lnc'

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