Strategic decision making is much more difficult to predict, even if people behave rationally. Nonstrategic decision making can be predicted relatively accurately if individuals behave rationally.
Why is the distinction important? Because it determines whether economists can model and predict the price and output of an industry. Thus, one distinguishes between monopolistic competition and oligopoly by whether or not firms explicitly take into account competitors’ reactions to their decisions. Also, in oligopolies collusion is much easier. In oligopoly there are fewer firms, and each firm is more likely to explicitly engage in strategic decision making- taking explicit account of a rival’s expected response to a decision you are making. In oligopolies all decisions, including pricing decisions, are strategic decisions.
In monopolistic competition, there are so many firms that individual firms tend not to explicitly take into account rival firms’ likely responses to their decisions. In oligopoly, firms explicitly take other firms’ actions into account. This mutual interdependence is the big difference between monopolistic competition and oligopoly. Oligopolistic firms are mutually interdependent and can be collusive or noncollusive. The central element of oligopoly is that there are a small number of firms in an industry so that, when making decisions, a firm must take into account the expected reaction of other firms. The Distinguishing Characteristics of Oligopoly In this chapter we discuss another blend: oligopoly- a market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account. In the last chapter we discussed competition, monopoly, and a blend of the two-monopolistic competition. “In business, the competition will bite you if you keep running if you stand still, they will swallow you.” Explain what antitrust policy is and give a brief history of it. Describe two empirical methods of measuring market structure. Explain the distinguishing characteristics of oligopoly. After reading this chapter, you should be able to: