Chapter 17

While the previous chapter introduced oligopolies, this chapter greatly expanded upon them. It first introduced the example of the market for tennis balls, which has four main competitors. The essence of this market is that there are only a few sellers. In analyzing oligopolies, we come across game theory, the study of how people behave in strategic situations or how people react when faced with alternative courses of action in relation to how others might respond to the action they take. Later in the chapter, we get fun buzz words like collusion and cartel. Collusion is the act of cooperating over production and price charged, and a cartel is the name for the group of firms acting in unison. Unfortunately, legal restrictions often prevent firms from working together, and people operating in their own self-interest often leads the end market outcome to not maximize total market profit, but for an individual firm to try and get a bigger piece of the pie. When all firms operate in their own self-interest, they reach what's called a Nash equilibrium, where the best strategy is chosen based on the strategies that others have chosen. Each decision made is made with two concepts in mind, the output effect, and the price effect. The output effect says that selling an extra gallon of water will raise profit, but the price effect says that an additional unit into the market will decrease the price of the good and decrease the price on all the other goods in the market. You have to identify the trade-offs before you make a decision. Overall, this chapter was very interesting, I would rate it 2/3 in terms of difficulty.