Chapter 17

Chapter 17 discusses oligopolies, their characteristics and how they compare to other types of markets. An oligopoly is a market with only a few sellers, each offering a product similar or identical to the others. One example is the market for tennis balls and the world market for crude oil because only a few countries in the Middle East control much of the world’s oil reserves. 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 concepts of game theory apply to oligopolies, such as the concept that explains why oligopoly cartels do not work: the prisoner’s dilemma. The prisoners’ dilemma shows that self-interest can prevent people from maintaining cooperation, even when cooperation is in their mutual interest. Since oligopolies try to behave as monopolies by forming trusts and since they try to operate at a level that is not socially efficient, policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition.

            Reading about oligopolies after monopolistic competition was very helpful for understanding the characteristics of oligopolies because monopolistic competition is easier to understand and has the same concepts. Reading about antitrust laws in US history classes did not teach me about the characteristics of the markets and what type of market antitrust laws are used. It is very interesting to learn about this topic from a different perspective.

Chapter 16

Chapter 16 discusses the characteristics of monopolistic competition. Monopolistic competitors are created as firms sell similar but not identical products. Examples of this are the markets for movies and computer games. In a monopolistically competitive market, each firm has a monopoly over the product that it sells, but this does not affect the consumer that much because all the products are similar. In the long run, monopolistic competitors will see their profits fall to 0 economic profits through the process of exit and entry. Like a monopoly, the profit-maximizing quantity is where MR and MC intersect, and the profit-maximizing price is found using the demand curve. Like a competitive firm, the long-run equilibrium is where price equals ATC, so the market will have zero economic profit. We learn in this chapter that what defines a market is the number of sellers or firms. The other characteristic that can define a market is the product. If the products are similar but not identical, then the market is monopolistically competitive. If the many firms sell identical products, then the market is perfectly competitive.

Chapter 16 seems to be discussing a more realistic version of a market than previously discussed. Before chapter 16, the markets that have been described are not very realistic because they do not apply all the time to markets in reality. Finally seeing a more realistic economic view of a market is very interesting because I realize how different I have thought about markets until now and how the things we discuss in class apply in reality.

Chapter 15

Chapter 15 discusses the aspects of monopolies. Monopolies have only been discussed briefly in previous chapters but this chapter discusses monopolies with a lot more detail about how they are formed, how they make profit, and the difference between a competitive market and the market of a monopoly. A monopoly is a firm that is the sole seller of a product without close substitutes and usually is the sole owner of a key resource. Being the sole seller in a market allows a firm to supply the market at a lower cost than other firms would be able to do. Chapter 15 compares characteristics of a competitive market to the market of a monopoly, like the maximizing of profits and government regulation.

            I have wondered about the characteristics of monopolies since they were mentioned very briefly in the textbook before chapter 15. Finally reading about monopolies has been very interesting. I assumed that monopolies were always a bad thing because I thought that, since they control the entire market, they would be able to place as high of a price as they would like on their product. But after reading Chapter 15, I have realized that this is not necessarily true. I have learned that since the market of a monopoly still has a demand curve, a firm cannot charge any price that they want because they need to obey the demand curve or else nobody would buy their product.