Oligopoly

If you go to a store lO buy tennis balls, it is likely that you will come home with one of four brands. Wilson, Penn, Dunlop, or Spalding. These four companies make almost all of the tennis balls sold in the United States. Together, these firms determine the quantity of tennis balls produced and, given the market demand curve, the price at which tennis balls are sold.

How can we describe the market for ‘tennis balls? The previous two chapters discussed two types of market structure. In a competitive market, each firm is so small compared to the market that it cannot influence the price of its product and, therefore, takes the price as given by market conditions. In a monopolized market, a single firm supplies the entire market for a good, and that firm can choose any price and quantity on the market demand curve.

The market for tennis balls fits neither the competitive nor the monopoly model, Competition and monopoly are extreme forms of market structure. Competition occurs when there are many firms in a market offering essentially identical products; monopoly occurs when there is only one firm in a market. It is natural to start the study, of industrial organization with these polar cases, for they are the easiest cases to understand. Yet many industries, including the’ tennis-ball industry, fall somewhere between these two extremes. Firms in these industries have competitors but, at the same .time, do not face so much competition that they are price takers. Economists call this situation imperfect competition.

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