Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 17 of 36 - Oligopoly
Section 8 of 23
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A competitive firm considers only the output effect (change in sales/profit when change amount of output) when deciding how much to produce.
A competitive firm is a price taker and must sell at the market price, so there is no price effect (change in sales/profit when change price).
As an oligopoly increases the number of its members
· the market becomes more like a competitive market
· the quantity produced approaches the socially efficient level where price = marginal cost
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Consider this scenario of international trade in automobiles:
· Toyota and Honda are the only automakers in Japan
· Volkswagen and BMW are the only automakers in Germany
· Ford and General Motors are the only automakers in the United States
If these countries prohibited international trade in autos
· each would have an auto oligopoly with only two members
· the market outcome would be higher prices and lower quantity
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In fact, the supply of cars is mostly a world market, closer to the competitive than oligopoly model.
Allowing free trade increases the number of producers from which each consumer can choose products.
Increased competition drives prices down, the more competition the closer the price is to marginal cost.
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free trade increases the number of producers
jiyū bōeki wa seisan-sha no kazu o fuyasu
自由貿易は生産者の数を増やす
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