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8.5: Stable Output and Price

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    In addition to realism and interdependency, stability is another unique characteristic that the oligopoly market structure does not share with either perfect competition or monopoly.

    In our last two modules, we examined how any change in either price or costs resulted in a firm altering its price and output (see figure 10).

    A diagram of a graphDescription automatically generated

    Figure 10

    For example, when the monopolist faces a demand, marginal revenue, and marginal cost curves like in figure 6A it charges a price of \(\mathrm{P}^*\) and produces a rate of output of \(\mathrm{Q}^*\). However, whenever a monopolist experiences a change in costs (a rise in costs causes the marginal cost curve to shift upward) then he/she alters both price and output in order to maximize profit. In figure 6B you see that the marginal cost curve has shifted upward (to the new curve labeled \(\mathrm{MC}_{\mathrm{New}}\)). The old price (\(\mathrm{P}^*\)) and rate of output (\(\mathrm{Q}^*\)) no longer maximizes profit. The monopolist must adjust to this new reality and alter the price charged (\(\mathrm{P}_{\text {New }}\)) and the quantity of output produced (\(\mathrm{Q}_{\text {New }}\)).

    So, perfect competitors and monopolists automatically change price and quantity when certain market conditions change. This is not always the case in an oligopoly market structure.

    Price and output tend to be more stable in oligopolies. The reason for this relative stability is the interdependency between firms.

    If one firm in a perfectly competitive industry lowered its price or increased its output, other firms would not react. The reason for this inaction is because each firm is very small and the action of one does not affect market conditions (i.e., market supply and demand do not shift). If market conditions remain unchanged then so does behavior. For firms in an oligopoly market structure, not responding to a competitor’s price change is not an option. When one firms lowers price to gain market share (think of the elevator example when you reached for more pizza) other firms must respond and counter the price cut (usually with a price cut of their own) if they are to hold on to their portion of the market (think of the example when your elevatormate slapped your hand to protect his share of pizza).

    The standard retaliator price cutting behavior is a well-known characteristic of oligopolies. Also well known are the ruinous effects from these “price wars.” This reality means that oligopolists seldom base their strategy price cuts. And this is why prices tend to be more stable in this market structure.

    News Alert

    It Has Been a Good Year for Video Games

    Will It Last?

    The entire economy is in a state of decline. Millions of Americans have lost their job as well as their homes. It has gotten so bad that may seem like there are no bright spots on the economic landscape.

    The economic outlook may indeed be dim, but it is not entirely dark. Take the video game industry as an example. Despite the depressing year for U.S. retail sales in 2009, video game console sale did rather well.

    A screenshot of a video gameDescription automatically generated

    The success of the Nintendo Wii was partially responsible for the increase in 2009 sales. With hits like Resort Sports and Wii Fit Nintendo took the industry lead in terms of sales.

    Both Sony and Microsoft managed to boost sales for their consoles, PS3 and XBOX, by cutting prices and adding some popular games to their product line.

    Though 2009 was a good year for video games there are no guarantees that the industry will see a repeat performance in 2010 if the recession drags on and job losses continue to mount.

    Based on the market share data in the article, what is the HHI score for the video console industry?

    1. 1000
    2. 2237.29
    3. 3276.26
    4. 3724.35

    This page titled 8.5: Stable Output and Price is shared under a not declared license and was authored, remixed, and/or curated by Martin Medeiros.

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