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Lecture PowerPoint® SlidesLecture PowerPoint® Slidesto accompanyto accompany
Prepared by
Marc Prud‘Homme, University of Ottawa 1
Chapter 17Chapter 17
OligopolyOligopoly
Copyright © 2011 Nelson Education Limited 2
Nash equilibrium:both firms cut fares
Cut fares Don’t cut fares
Cut fares
Don’t cut fares
Air Canada
WestJet
$600 million
$600 million
$200 million
$800 million
$800 million
$200 million
$400 million
$400 million
3Copyright © 2011 Nelson Education Limited
Fare War
Arms Race between Superpowers
Disarm Arm
Disarm
Arm
USSR
US
USSR: 0
US: 0
USSR: 45
USSR: -10USSR: -15
US: -10
US: -5US: 30
Each country’s dominant strategy: arm
Copyright © 2011 Nelson Education Limited 4
Free Riding
Study Free Ride
Study
Free Ride
Nerd
Slacker
Nerd: 70
Slacker: 20
Nerd: 60
Nerd: 0Nerd: 50
Slacker : 0
Slacker : 0Slacker : 60
Nerd’s dominant strategy: study
Slacker’s weakly dominant
strategy: free ride
Copyright © 2011 Nelson Education Limited 5
Public Policy Toward Oligopolies
Recall one of the Ten Principles from Chap.1: Governments can sometimes improve market outcomes.
Cooperation among oligopolists → P↑ and Q↓.
Policymakers: Promote competition, prevent cooperation
→ to move the oligopoly outcome closer to the efficient outcome.
Copyright © 2011 Nelson Education Limited 6
Canada’s Competition Act
Against:
conspiracy
price-fixing
price discrimination
predatory pricing
bid-rigging
price maintenance
Copyright © 2011 Nelson Education Limited 7
American Airlines vs. BraniffA phone call from Robert Crandall of American Airlines to Howard
Putnam of Braniff Airlines, on February 21, 1982. The call was recorded by Mr. Putnam.
Mr. Crandall: I think it’s dumb as hell for Christ’s sake, all right, to sit here and pound the @!#$%&! out of each other and neither one of us making a @!#$%&! dime.
Mr. Putnam: Well...Mr. Crandall: I mean, you know, goddam, what the hell is the
point of it?Mr. Putnam: But if you’re going to overlay every route of
American’s on top of every route that Braniff has -- I just can’t sit here and allow you to bury us without giving out best effort.
Mr. Crandall: Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years.
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American Airlines vs. BraniffMr. Putnam: Do you have a suggestion for me?Mr. Crandall: Yes, I have a suggestion for you. Raise your
goddam fares 20 percent. I’ll raise mine the next morning.Mr. Putnam: Robert, we...Mr. Crandall: You’ll make more money and I will, too.Mr. Putnam: We can’t talk about pricing!Mr. Crandall: Oh @!#$%&!*, Howard. We can talk about any
goddam thing we want to talk about.
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