11. 3 Oligopoly and Game Theory
Industries that are made up of a small number of large firms have a
market structure called oligopoly, from the Greek words oligos polein,
meaning “few to sell.” An oligopoly is an industry that contains two or
more firms, at least one of which produces a significant portion of the
industry’s total output. Whenever there is a high concentration ratio for
the firms serving one particular market, that market is oligopolistic. The
market structures of oligopoly, monopoly, and monopolistic competition
are similar in that firms in all these markets face negatively sloped
demand curves.Profit Maximization Is Complicated
Like firms in other market structures, an oligopolist that wants to
maximize its profits produces the level of output where its marginal
revenue equals its marginal cost. But determining this level of output is
more complicated for an oligopolist than it is for any other kind of firm
because the firm’s marginal revenue depends importantly on what its
rivals do. For example, if Toyota decides to increase its production of
compact cars in an attempt to equate its MR with its MC, Ford and Nissan
may respond by aggressively increasing their output of compacts—thus
reducing Toyota’s marginal revenue. Alternatively, Ford and Nissan might
reduce their output of compacts and instead focus their attention on