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Unit 7 — Oligopolies

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Purpose:

To show that many markets are dominated by a small number of firms, and how these try to avoid price competition.

Objectives:

  1. Most markets in the U.S. fall somewhere in between perfect competition and monopolies. Either there are only a few large firms in an industry (oligopoly), or there are many firms which sell differentiated products (monopolistic competition). Producers in these industries realize that price competition will only reduce profits for every firm in the industry so they often try to gain market power through nonprice competition (e.g., product differentiation, advertising, and aggressive marketing).
  2. When there are few firms in an industry, they may attempt to fix prices. This results in higher prices and less production of the good than would occur under perfect competition, and it adversely affects economic efficiency. Unregulated price fixing is illegal.
  3. Large firms may be very helpful for stimulating long-term growth through R&D, by capturing economies of scale, by superior management, and through their efforts to grow larger.
  4. In some industries (airlines, railroads, trucking) the government has regulated prices either to help the industry grow or to control the pricing behavior of the industry. Generally, the affected industries favor regulation because it saves them from having to compete on the basis of price, but they often become very inefficient and have unnecessarily high costs. Also, regulated companies can often “capture” and co-opt regulators.

Audio and Transcripts

Meet the Series Experts

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Alfred Kahn

Alfred Kahn

Chairman of the Civil Aeronautics Board during the period when it ended its regulation of the airline industry, paving the way for low-cost airlines from People Express to Southwest Airlines.

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Leo Ribufo

Leo Ribufo

Distinguished Professor of History at George Washington University and visiting professor at Fudan University in China.

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ECONOMICS IQ?

  1. Monopolistic competition occurs where there are...

    many sellers, and considerable product differentiation.

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  2. Perhaps the most OBVIOUS difference between monopolistic competition and oligopolies is the...

    Oligopolies can sell differentiated products (automobiles are an example), and though the amount of advertising each conducts may differ, consumers are not as likely to be aware of that as of the number of sellers involved. Monopolistic competition involves many sellers, oligopoly few.

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  3. Perhaps the simplest definition of oligopoly is...

    The second option is characteristic of oligopolies, but not the definition. The first and fourth options are completely incorrect.

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  4. Research and development in the auto industry has been widely and severely criticized by economists MAINLY because...

    there has been too much emphasis on style, and not enough on substantive improvements.

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  5. In the years following the passage of the Sherman Antitrust Act, its supporters have come to regard it as...

    well intentioned but overly general.

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  6. According to the videotape presentation, airline deregulation has taught us which of the following important lessons?

    Regulation often works more to the benefit of the industry than the consumer.

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Glossary

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