Author: John Bouman

Oligopoly Characteristics Four characteristics of an oligopoly industry are: 1. Few sellers. There are just several sellers who control all or most of the sales in the industry. 2. Barriers to entry. It is difficult to enter an oligopoly industry and compete as a small start-up company. Oligopoly firms are large and benefit from economies of scale. It takes considerable know-how and capital to compete in this industry. 3. Interdependence. Oligopoly firms are large relative to the market in which they operate. If one oligopoly firm changes its price or its marketing strategy, it will significantly impact the rival firm(s). For instance, if Pepsi lowers its price by 20 cents per bottle, Coke will be affected. If Coke does not respond, it will lose significant market share. Therefore, Coke will most likely lower its price, too. 4. National advertising. Oligopoly firms frequently advertise on a national scale. Many Super Bowl, World Series, Wimbledon finals, World Cup finals, NBA finals, and NCAA March Madness advertisements are sponsored by oligopoly firms. Examples of Oligopoly Industries The following are examples of oligopoly industries: The automobile industry (Volkswagen, Toyota, Chrysler, Daimler, Ford, GM) The steel industry (China Baowu, ArcelorMittal, Ansteel, Nippon Steel) The mobile phone manufacturing industry (Apple, Samsung, LG) The wireless phone provider industry (Verizon, T-Mobile, AT&T) The aircraft manufacturing industry (Boeing, Airbus) The beer (wholesale) industry (Anheuser-Busch Inbev, Heineken, Kirin Brewery,...

Game Theory History Game theory has become increasingly important in microeconomics, as it has in other disciplines, such as biology, psychology, sociology, and computer science. In economics, John Neumann and Oskar Morgenstern’s 1944 Theory of Games and Economic Behavior laid the foundation. In 1994, John Nash (pictured) won the Nobel Prize for his revolutionary game theory models. He was also the subject of the 1998 biography by Sylvia Nasar and the 2001 film A Beautiful Mind, starring Russell Crowe. A Game Theory Simulation Game theory uses the same setup as regular games, including players, moves, strategies, and rewards. Below is an example of a simple game simulation, which helps to explain some oligopoly behavior. Let’s say that an oligopoly industry consists mainly of two rival competitors (for example, Pepsi and Coca Cola). The table below illustrates strategies and rewards, depending on whether the firms cooperate in price setting or not. After playing the game simulation, we notice the following outcomes: Firm B sets a high price Firm B sets a lower price Firm A sets a high price Firm A’s profit = $40 million Firm B’s profit = $40 million Firm A’s profit = $10 million Firm B’s profit = $60 million Firm A sets a lower price Firm A’s profit = $60 million Firm B’s profit = $10 million Firm A’s profit = $15 million Firm B’s profit...

What’s in This Chapter? Is there more or less poverty in countries that have higher income inequality? Consider the following hypothetical example. Country A: The poorest income group earns an average of $4,000 per year. The richest income group earns an average of $7,000 per year. Incomes are relatively equal. Country B: The poorest income group earns an average of $12,000 per year. The richest income group earns an average of $100,000 per year. There is a high degree of income inequality. Assuming prices of goods and services are the same in both countries, which country do you prefer to live in? If comparisons bother you and you mostly want people to have relatively equal incomes, you will answer country A. If you care about absolute living conditions and purchasing power, you will answer country B. The standard of living is higher in country B, and the opportunities for advancement are greater. People in countries with high degrees of income inequality typically do not stay poor. Nearly 60% of people who are poor in the United States, are no longer poor ten years later and 85% are no longer poor by the end of their career. Not all, but a substantial percentage of the people in the group that remains poor (the ones remaining poor after 10 years) are in welfare programs. Do welfare programs encourage households to remain...

Income Inequality How much income inequality is appropriate? This is a hotly debated topic among economists and politicians. Nearly everyone in industrialized countries agrees that some degree of income inequality is welcome. The debate is about how much inequality is fair. The current degree of inequality in the United States is shown in the table below. Income inequality has widened in most industrialized countries. For example, in the United States, in 1979 the top 20% earned 44% of the total income. In 2023, the highest income earners (top quintile) earned 51.9% of the country’s total earnings. Note that these percentages don’t take into account welfare transfer payments and tax payments. If transfer payments and taxes were included, the gap between the highest and lowest quintiles wouldn’t be as wide. Based on the table, the highest income earners are earning more as a percentage of total earnings in the country compared to decades ago. The lowest quintile of income earners’ share has decreased since several decades ago. Is this a bad thing? Not necessarily. While the relative share of the lower income groups has declined, the absolute amount (absolute standard of living, or purchasing power) of all income groups has increased. It is true that the highest income groups gain the most, but looking at any average 10 year period of time, even the real (inflation adjusted) income of the...

Advantages of Income Equality Advantages of a system of income equality are 1. Less use of natural resources There is generally less use of natural resources and less conspicuous consumption as incomes and the standard of living in countries with equal incomes is lower. 2. More consumer satisfaction among the poor Redistribution of incomes or wealth increases consumer satisfaction among the poor. A dollar to a poor person provides more satisfaction than it does to a rich person. Thus, taking a dollar from the rich and giving it to the poor increases satisfaction. The only caveat with this statement is that if equality leads to a low standard of living among all groups, there will be no money to distribute from the rich to the poor (there will be no rich). 3. More political equality In a system of inequality, poor people generally have less political influence, because they have less opportunity to contribute to lobby groups, political fundraisers, and campaigns. When there is equality, the argument is that everyone has the same economic influence. 4. Fewer incentives for corruption and illegal activities for financial gain In an economic system in which incomes are low and more equally distributed (typically in a non-free market system), temptations to break the law for financial gain are less prevalent. In economies with higher levels of income inequality, the financial rewards for cheating and...