Oligopoly

Summary

In this detailed exploration of oligopolies and the prisoner's dilemma, George Frost explains firm behavior in oligopoly markets using this classic game theory model. The discussion delves into how individual rationality leads firms to compete rather than collude, even when acting in self-interest as a group would be more profitable. The model's implications suggest that collusive behavior in oligopoly settings is challenging to sustain, emphasizing factors such as legal facilitation, market structure, and barriers to entry as influencing potential collusion.

Highlights

• George Frost breaks down the prisoner's dilemma within the context of oligopolies, providing insights into firm behavior and competition. 🔍
• The discussion covers how firms, acting in their own self-interest, tend to compete rather than collude, even if collusion would benefit them collectively. 💡
• Various factors are examined, including government facilitation, product similarity, and cost structure, which influence the tendency towards collusion. ⚖️
• Barriers to entry play a pivotal role in oligopolies, with high barriers supporting collusion by limiting potential competition. 🚧

Key Takeaways

• Oligopoly markets pose challenging dynamics due to the prisoner's dilemma, where firms are incentivized to compete rather than collude, despite potential group benefits from collusion. 🤔
• The prisoner's dilemma model demonstrates that even in small markets, achieving collusion is difficult without external support, such as legal facilitation. 🔒
• Multiple factors, including legal facilitation, cost structure similarity, and product homogeneity, affect the likelihood of collusion in an oligopoly. 💼
• High barriers to entry are crucial for sustaining collusion in oligopolies, as they prevent new competitors from disrupting collusive agreements. 🚪
• The demand elasticity at the competitive price influences the likelihood of collusion, with inelastic demand making collusion more feasible. 📈

Overview

George Frost delves into the complex interactions within oligopoly markets, primarily focusing on the prisoner's dilemma model. He illustrates how two firms, despite a common interest in maximizing profits through collaboration, often fail to maintain collusion due to individual incentives to cheat the arrangement. This paradoxical situation is typical in many oligopolistic industries, revealing much about market competitions and firm strategies.

The lecture further explores how external factors like government policies on collusion significantly impact firms' ability to sustain such arrangements. For instance, legal frameworks that penalize collusive contracts make it challenging for firms to justify collaborative pricing strategies. Frost also brings real-world scenarios into the discussion, citing historical examples like the airline industry in the 1970s to illustrate these dynamics.

Frost elaborates on several critical factors that influence collusion within oligopolies, such as product homogeneity, cost structure, demand elasticity, and barriers to entry. He discusses how each element either facilitates or hinders the potential for firms to successfully collaborate. In particular, high barriers to entry are crucial, as they prevent new market entrants from undermining collusive agreements.

Chapters

• 00:00 - 00:30: Introduction to Prisoner's Dilemma The chapter introduces the concept of the Prisoner's Dilemma, particularly within the context of oligopoly market structure. It provides a brief overview of how the model is applied to explain the behavior of two firms in such a market. It references an earlier exercise from the semester where students engaged in a simplified version of the Prisoner's Dilemma game for points, aiming to link theoretical understanding with practical application.
• 00:30 - 01:00: Class Example of Prisoner's Dilemma The chapter titled 'Class Example of Prisoner's Dilemma' discusses a practical classroom example illustrating the concept of the Prisoner's Dilemma. In the example, students are given a choice to 'keep' or 'share' on a piece of paper. If enough students choose 'share', each receives two extra points on a test. However, if a student individually chooses 'keep', they receive seven extra points. Despite the collective benefit of sharing, most students choose to keep to maximize individual gain, demonstrating the conflict between individual self-interest and group benefit inherent in the Prisoner's Dilemma.
• 01:00 - 02:00: Real Life Prisoner's Dilemma Scenario This chapter explains the concept of the prisoner's dilemma using a real-life scenario involving two prisoners. It outlines how the dilemma is named after situations where two criminals are caught by the police for a minor and major crime, but the authorities only have evidence for the lesser offense. The chapter sets the stage for exploring strategic decision-making and interactions between rational individuals in such scenarios.
• 02:00 - 03:00: Application of Prisoner's Dilemma to Firms The chapter explores the classic Prisoner's Dilemma scenario and its application to business firms. It explains how, in a typical situation, two criminals are arrested and placed in separate rooms by authorities. Each is offered a deal of reduced sentence in exchange for confessing to a more severe crime, despite their prior agreement to remain silent about the more serious offense. This scenario illustrates the conflict between individual and collective rationality and the incentive to betray one's partner for personal gain, a concept applicable to competitive strategies in the business world.
• 03:00 - 04:00: Economic Outcomes of Collusion vs. Competition The chapter explores the economic implications and outcomes of collusion versus competition among business firms. It starts with an anecdote about a student humorously misunderstanding the origin of 'prisoner's dilemma', hinting at a common confusion with economic game theory models. This model traditionally applies to prisoners but is adapted here for businesses. It suggests that firms often have incentives to collude, akin to acting as a monopolist, to enhance their economic outcomes.
• 04:00 - 05:00: Dominant Strategy in Oligopoly In this chapter, the concept of dominant strategy in an oligopoly is discussed through the interaction of two firms. When these firms collude, they act like a monopolist, which allows them to charge higher prices and restrict output, resulting in economic profits of ten thousand dollars each. This does not mean ten thousand dollars precisely but rather refers to profits larger than what they would achieve in their next best alternative. However, if these firms were to compete instead, competition would drive prices to their lowest level, leaving the firms with zero economic profits.
• 05:00 - 06:00: Introduction to Collusion In the chapter titled 'Introduction to Collusion,' the concept of economic profits in relation to competition and collusion among firms is explored. Firms in a competitive market experience zero economic profits, earning no more than what is typical across industries, and thus do not attain monopoly profits. The chapter highlights the incentives for firms to engage in collusion. A scenario is presented where if Firm 1 colludes with Firm 2, they can avoid competition. By colluding on high prices, Firm 2 can secure $10,000 in profits, but by charging lower prices and capturing the entire market, Firm 2 could earn $15,000, illustrating the competitive dynamics at play.
• 06:00 - 07:00: Legal Facilitation of Collusion The chapter discusses the legal facilitation of collusion among firms. It highlights the dilemma firms face between colluding to keep prices high and competing, which could result in price wars and losses. The transcript details a scenario in which one firm considers betraying the collusion agreement by reducing prices. However, the implications of such actions are analyzed, suggesting that maintaining collusion may result in losses, whereas competing would mean breaking even at worst. The chapter implies that, although collusion might offer short-term stability, competitive behavior might be the lesser of two evils when legal ramifications and monetary loss are considered.
• 07:00 - 08:00: Influence of Government on Collusion This chapter discusses the influence of government on firm collusion through the lens of the prisoner's dilemma model. It explains that, while collusion between firms in an oligopoly could be financially beneficial for them as a group, individual incentives drive them to compete instead. The chapter highlights the inherent tension between the collective benefit of collusion (e.g., earning $20,000) and the risk of zero payoff due to competitive self-interest. Ultimately, the chapter suggests that in such market structures, firms often end up competing because of individual incentives, despite potential government influence or desire to act otherwise.
• 08:00 - 10:00: Polygamy as Economic Model This chapter delves into the concept of polygamy as an economic model, using game theory as the lens of analysis. The dominant strategy in game theory is emphasized, where firms or individuals are better off competing regardless of the other party's actions. This scenario is compared to the prisoner's dilemma, suggesting that oligopolies will result in allocative and productive efficiency due to inherent competition. However, the challenge lies in resolving the prisoner's dilemma, which is noted as a difficult task.
• 10:00 - 12:00: Challenges of Collusion in Large Groups The chapter discusses the challenges of collusion in large groups, particularly in the context of oligopolies. It starts by acknowledging the difficulties outlined by the prisoner's dilemma model, which suggests that collusive behavior is challenging to achieve. However, the chapter introduces the idea that certain factors might make collusion more feasible in some scenarios compared to others. The discussion aims to explore these factors in detail.
• 12:00 - 15:00: Factors Affecting Collusion: Cost and Product This chapter explores the various factors that influence the likelihood and success of collusion among firms, particularly focusing on cost and product aspects. It explains that while collusion can be challenging, certain factors can enhance the chances of it happening, while others can severely hinder the process. One significant factor discussed is legal facilitation, which assesses how government policies impact the ease or difficulty of collusion. For instance, solving the prisoner's dilemma model through contracts is discussed, highlighting how legal frameworks can affect collusive agreements.
• 15:00 - 20:00: Price Elasticity of Demand and Collusion The chapter discusses the concept of price elasticity of demand in the context of collusion between firms. It explains that while firms may enter into contracts to enforce collusive behavior to keep prices stable, such contracts may become ineffective if the government decides not to enforce them. Once contracts are deemed unenforceable, firms have an incentive to cheat on the collusive arrangement and compete against each other, undermining the collusion.
• 20:00 - 21:00: Barriers to Entry and Collusion This chapter discusses the concept of barriers to entry and collusion in business. Particularly, it highlights the legal framework in the United States where collusion is illegal by definition due to antitrust laws. However, it also explores the scenarios where government intervention may inadvertently or purposefully support collusion between businesses due to political pressure. This creates a complex environment where firms might perceive collusion as viable and might have incentives to cheat the collusive arrangements they engage in.

Oligopoly Transcription

• 00:00 - 00:30 okay now I'm going to direct your attention to the prisoner's dilemma model which we're going to use to explain uh firm's behavior in a market structure known as oligopoly we're going to assume that there are two firms um and this is called the prisoner's dilemma if you remember we played the prisoner's dilemma game or version of it at the beginning of the semester when I gave you a chance to um uh play a game for points in your tasks if you remember I said I'll give you a choice to write
• 00:30 - 01:00 keep or share and a piece of paper if you uh if enough of you write share I'll give you all two points on the test those of you write share but if you can write keep and that way I'll give you a full seven points on the test and if you remember in that particular example uh almost many of the class wrote keep or that's usually what happens in classes and I'm sure it probably happened in yours a lot of class rights keep they go for the full seven points even though you'd have been better off as a group to all share and get the two points it becomes in your individual self-interest
• 01:00 - 01:30 to write keep and try to capture the full seven points so if you take a look at this we're going to take a look at a real prisoner's dilemma model now the name prisoner's dilemma comes from um the fact that um it comes from like a real life situation where you have two prisoners who commit a crime a lower level crime and a higher level crime um the police have evidence about the lower level crime but they don't know what happened with the higher level crime what happens is the police arrests the two uh the two potential um um uh criminals and they say to them
• 01:30 - 02:00 where they actually are criminals they arrest them and they say um we're gonna put you in separate rooms and then we're going to talk to you before they go into separate rooms the prisoners say to each other don't say anything about the higher level crime they got us in a lower level crime but they don't have us in the higher level crime but what happens though please put the prisoners in separate rooms and they tell them if you tell us what happened about the higher level crime we will give you um a lower sentence and they give that deal to each prisoner and each prisoner has an incentive to confess that's where the name comes from I once
• 02:00 - 02:30 said a student who actually asked me um honor student if the name of the model prisoners dilemma became came from the fact that there was some guy named prisoners dilemma and they aimed it after him yeah you can't make this stuff up in any event let's take a look at these particular numbers if you have um if these These are going to be not for prisoners though this is going to be for business firms so business firms have an incentive to get together if they can and collude with each other act like a monopolist and so if you take a
• 02:30 - 03:00 look at these two firms get together and collude act like a monopolist which is what charge higher prices and restrict output they will make ten thousand dollars each of economic profits remember that doesn't mean ten thousand dollars exactly it means ten thousand dollars larger than their next best opportunity all right so that's one thing now if they both end up competing they both end up competing then the results like competition competition forces prices down to their lowest level which means the firms will be left with zero economic profits again I'm not saying
• 03:00 - 03:30 zero profits zero economic profits meaning that all firms in this industry make as much as firms typically make in other industries that is to say no Monopoly profits but notice the incentives if you're firm two and you can get firm one to collude right if you can get firm one of collude you don't have to worry about competition here if you worry about if you know that they're going to charge high prices look what you can do if you charge high prices you'll get ten thousand dollars as firm too but if you charge low prices you take the whole Market away from them you'll get fifteen
• 03:30 - 04:00 thousand and you'll leave them with a loss so what's your incentive if you can get them to collude you should compete what a firm one won't collude they say they'll collude and then they end up charging low prices what if firm one were to betray you like that well firm one were to do that if you take a look at the numbers if you continue to collude you'll lose the money so what's your better option your better option is to compete at least that way you get nothing which is better than the negative five so notice under each situation you are better off uh
• 04:00 - 04:30 competing that is if you're firm two and from One problems the reciprocal problem so they're better off competing notice as a group you're better off colluding you're better off getting the twenty thousand dollars you don't want to end up here down at zero zero but individual self-interest gives you an incentive to compete um and that's what the prisoner's dilemma model says it says even in an oligopoly Market structure even though the firms may want to collude they'll end up competing because they have what
• 04:30 - 05:00 game theorists call a dominant strategy they're better off competing in any scenario both firm one and firm two doesn't matter what the other person does you're still better off competing and because of this the prisoner's dilemma model suggests that you don't really have to worry about an oligopoly behaving inefficiently we're going to get allocative and productive efficiency because they are competing now the trick becomes what if they can solve the prisoner's dilemma now that's pretty hard to do
• 05:00 - 05:30 um but we're going to talk next about some factors which would allow you to possibly be able to collude in the real world and we'll do that we'll do that next as we've talked about the prisoner's dilemma model suggests that it's going to be pretty hard to pull off collusive behavior in an oligopoly setting but there are some factors which make collusion more likely than than other scenarios I don't want to make the sound
• 05:30 - 06:00 like collusions likely but there are some things which improve the odds uh and there's some things which make it almost impossible glue so I want to talk about those factors now the first factor that we're going to talk about which makes collusion easier is legal facilitation how easy does the government make it for firms to collude so for example one of the ways you can solve the prisoners dilemma model is you could sign a contract right both parties know that they have an incentive to cheat on the arrangement and compete once they agree to charge high prices of an incentive to charge low prices since
• 06:00 - 06:30 both parties know that one of the ways they can protect protect themselves is with a contract but if the government comes along and says we will not enforce any contracts which try to uh try to legitimize Collision inclusive Behavior or try to make valid Clues collusive Behavior then that'll then the contracts basically the contract strategy is pointless and both uh firms allowed an incentive to uh cheat on their collusive Arrangement and compete with each other
• 06:30 - 07:00 um so for example in the United States we have a per se rule against collusion any attempts to collude other part of business firms are declared illegal on their face um uh but again sometimes you might say well why would a government make it easy to collude well sometimes government is subject to political pressures uh which make um it likely that the government will help the firms collude so for example um if you were two businesses competing against each other and you knew that you were going to have an incentive to cheat on that collusive Arrangement and you
• 07:00 - 07:30 knew that the government had a law which said collusion is per se illegal one of the things you could do is you could get the government to pass a price for uh you could the firms could Lobby the government have the government in uh give you a minimum price that you all have to charge basically raise prices above equilibrium and that's a way that the firms could enforce their collusive Arrangement by getting government to set a minimum price Which is higher than equilibrium this actually arguably happened during the 1970s in the in the
• 07:30 - 08:00 airline industry where prices were set or partially set by government a government regulatory board that government regulatory board tended to be dominated by the interests of the Airlines and so there are some people believe that that they were able to use the price floor as a way of enforcing a collusive pricing arrangements so that's the first Factor legal facilitation how easily easily does the government make it for firms to collude if they make it easier for firms to collude then firms are more likely to collude if the government says we're not going to allow
• 08:00 - 08:30 the law to help you collude then obviously collusion is going to be pretty difficult a very Politically Incorrect and strange argument regard inclusive Behavior has to do with um an argument that comments made about polygamy there's an economist named Stephen Landsberg and he made an argument one of his books the arm share Economist that polygamy is actually a Pro of female institution not a pro-male institution and that the government is a way that the menus menus the government
• 08:30 - 09:00 in order to enforce their collusive Arrangement uh which they call monogamy now you might be saying how is polygamy considered a pro a pro-female Arrangement is traditionally not been a pro-female Arrangement well picture a society in which in which men can men can marry more than one woman women cannot marry more than one man women have free choice about who to marry and divorce is easy so again that's not a very that's not
• 09:00 - 09:30 very much like traditional polygamies polygamous societies but let's just say that that that's the polygamous Society we're talking about so we can focus on the polygamy aspects um if men can marry more than one woman that dramatically drives up the demand for women in the marriage dating or the marriage marketplace right um because now men instead of just demanding one woman they can demand a thousand women theoretically so that'll drive up the demand for women that'll make women more scarce and that'll drive up their price in the marriage Market they'll be able to command a war in getting married and
• 09:30 - 10:00 you might be saying what do you mean command more are they getting paid directly for this they could be um but but that's not exactly what I'm talking about if you want to understand what I'm talking about now imagine that you're a guy interested in dating women would you want to go to a school which had a lot of women or a school which had very few women uh you want to go to a school who with uh with a lot of women one of the reasons is the price is low if if you don't bring flowers at Valentine's Day you don't do a good job on the birthday um in general you don't do the special
• 10:00 - 10:30 things that you you would do in a normal dating situation you might be able to get away with that because uh the price that women can command is so are so low because women have so few options and men have so many on the other hand if you went to a school in which women were scarce um and um and you were interested in dating them you'd have to get them flowers on Valentine's Day bring get them an extra birthday present you would have to do all kinds of nice things in order to maintain the relationship because they have lots of options and you don't what does this have to do with polygamy
• 10:30 - 11:00 well polygamy basically is like going to a school uh where where women are scarce because um basically the price of them are going to be very high because they're going to be scarce because men are able to demand more of them that'll drive up their price this is a disaster for men men don't want to have to get presents for Valentine's Day get presents for people on Valentine's Day they don't want to have to do extra special things on birthday they don't want to have to treat people nicely um and so this is going to make them have to treat women uh extra nice so to speak so the argument is the men get
• 11:00 - 11:30 together they they decide not to um not to have more than one wife they get together and agree to only go for one each that will keep the price in this case low they'll collude in this case as buyers to keep the price low uh the problem is is once all the men agreed to only go for one woman one woman that makes the price that a woman can come in in the marketplace a very very low which means that some buyers will start to try to keep try to pick women up on the cheap and then all the the men will cheat on the arrangement
• 11:30 - 12:00 and go for extra women so the theory is is that men need government to help them maintain their collusive Arrangement and the way they do that is the government passes a law that says you only can go for one woman that will keep the price of women in the marketplace low and make it um and now be good for men as opposed to being good for good for women again this argument assumes a very strange polygamous Society where women have free choice about who to marry and divorce is easy obviously if divorce is difficult or women don't have choice that power
• 12:00 - 12:30 structure and that in that relationship and that Arrangement changes dramatically and shifts much more towards or almost completely demand but if you just focus on the polygamy polygamy would be a big disaster for men because of all the extra price that they would have to pay in order to obtain an extra woman and or even your first one even their first wife and that and so they agree to not do that and then they use government to enforce that a collusive Arrangement by punishing those people who go for more than one more than one wife so
• 12:30 - 13:00 again what's the point of all this government can make collusion easier if it wants to you have to ask yourself the question do you really want government making collusion easier um obviously we've seen that even in the two the two firm model the prisoner's dilemma model which used only two firms collusion was hard to pull off um it'd be almost impossible to pull off if you had a hundred firms um if you want an example of this uh think about if you tried to pull off a collusive arrangement in a class with a curve right in a class with a curve basically you have an incentive with your fellow students to get together and
• 13:00 - 13:30 agree not to work hard that way you don't have to work and the grave is going to end up basically the same anyway because the teachers decided to allocate a certain number of A's a certain number of B's a certain number of C's certain number of D's and a certain number of ABS so basically rather than work and end up in the same spot you just all agree not to work and that will you get the benefit of having your free time and the grades end up the same anyway um so you might try to reach that agreement with your fellow classmates the problem is once you reach that agreement the prisoner's dilemma model sets in once everybody agrees to
• 13:30 - 14:00 suppress their work effort everyone has incentive to work harder in order to capture the A in the class so we ask this question would you have an easier time pulling off that collusive arrangement in a class of five people or one of those classes like at one of the big state universities of 500 people uh much easier to pull it off with a five-person class and a 500 person class five person class you can kind of monitor people's behavior better you can figure out who is cheating on the arrangement five project person class it's almost impossible so when it comes to the when it comes to collusion
• 14:00 - 14:30 in the marketplace collusion is is much more likely if you have a small number of firms and a large number of firms again I'm not saying collusion is likely prisoners dilemma models suggest it's going to be really hard to pull off but it's much easier to pull off if you have a couple firms nearly impossible to pull off if you have a large number of firms so the smaller number of the firms the more likely collusion the larger number of firms the less likely collusion okay two additional factors which uh which affect collusion are similarity of cost structure and homogeneity of
• 14:30 - 15:00 product uh let me try to explain how they both the reason I'm grouping them together is it's kind of the same argument um when you're trying to collude you're basically trying to get your fellow competitors to stop competing and agree to raise prices and basically that's going to be easier if those firms are more similar to you than they are dissimilar so for example if you guys have radically different costs you're each going to have a very different view about what the Monopoly price should be right that's what you're doing with collusion right you're raising your prices in such a way that you achieve the uh the Monopoly price but if you
• 15:00 - 15:30 have a low cost and somebody else has high cost the optimal price um for for collusion is going to be different for you guys and you're going to have to hammer that out agree try to uh compromise and that's going to make collusion more difficult and as we've already talked about collusion is difficult enough to begin with according to the prisoners dilemma model so you basically the more similar your cost structure are the more likely you are going to be able to reach an agreement on the optimal price and that makes collusion more likely the more
• 15:30 - 16:00 dissimilar your cost structures are the more difficult it is going to be for you to reach that agreement and the less likely you are to collude same thing with homogeneity of product the more homogeneous your products are the more similar your products are the more likely you are to collude the more dissimilar the harder it's going to be to collude a simple example illustrate that point let's say I'm selling a a sneaker and I'm selling the sneaker for a hundred dollars and you're selling the sneaker for uh 250 let's say it's a higher quality sneaker and we want to collude because we do have customers
• 16:00 - 16:30 which uh you know think about my product or think about your product so when we talk about colluding you might say to me if you're the high quality sneaker you might say okay I'm selling my sneakers for 250 uh you sell them for 100 I think maybe your optimal price you should push your price up to 225 will push my price up to 275. what's the object I'm really actually competing with you by raid causing your price to go up that high and my personal go up slightly higher I can maybe take the entire market for myself similarly
• 16:30 - 17:00 um if I was charging a hundred and you were charging 250 I might say okay uh we should raise prices you should charge a thousand dollars for your sneaker and I'll charge um 150 that way I can shift more of the business towards me if we're both basically selling the same product um the exact same product that we're trying to try to include we'll both agree oh okay let's say our price is is fifty dollars and we're both selling it for 50 because it's the exact same product and now we have to raise prices we'll readily agree on what the Monopoly price is we won't have that strategic Behavior problem we'll be easier able to
• 17:00 - 17:30 come to an agreement so that's the reason why the more similar the product the more likely collusion the less similar the product the less likely collusion another factor that affects collusion is which is a little harder to understand is the last price elasticity of demand at the competitive price okay um so let's say you and I are competing and we're competing in a market in which the demand for our product is currently inelastic um and we want to raise prices
• 17:30 - 18:00 um so I come to you and I say okay let's let's raise prices um if the demand is inelastic we know that that is going to have the effect of increasing total revenue right because the percentage increase in the price will offset the percentage decrease in the price by definition because it's inelastic right inelastic means the percentage change in quantity demanded is less than the percentage change in price so we'll raise the price by let's say 10 quantity will fall by something less than 10 percent which means our
• 18:00 - 18:30 revenues are going to go up we're also by colluding because people are buying less from us we're going to end up producing less so by colluding we're going to increase our profits because our revenues are going to be higher we're also making less of the goods so our total costs are going to be lower and that'll actually increase our total profits so it makes sense for us to collude when the demand for the product is inelastic at the competitive price um what if it were elastic at the competitive price well then it's not as clear as to what's happening to our profits right maybe our profits aren't even going up but if they are going up
• 18:30 - 19:00 they're not going up but very much let's try to take a look right so if we raise prices that's what collusive behavior is Right raising prices if we raise prices and it's elastic at the competitive price then the amount people buy will drop by a larger percentage and our revenues as a result of the collusive behavior will actually go down now because we're not going to be making as much or costs will go down as well so profits could be going up but they won't be going up by as much as they would be if it's inelastic so if it's CL if it's
• 19:00 - 19:30 inelastic at the competitive price it makes collusion more likely if it's elastic at the competitive price it makes collusion um less likely um just one thing notice I keep on saying inelastic at the competitive price the reason why I say that is sometimes people make the mistake and think that it's talk about inelastic after the collusion takes place um when you are colluding think about what we just said if it's inelastic right you would want to raise your price because your Revenue would go up and
• 19:30 - 20:00 your cost would go down so if it's inelastic raise your price and profits will go up so it's still inelastic what would you do you'd raise prices still inelastic what would you do you'd still raise prices still in elastic what would you do you'd still raise prices you actually wouldn't stop this behavior until you believe the demand for your product is elastic it's in the elastic range of of demand which means that you have maximized your profits if you're a monopoly so you actually look at what the elasticity of demand is when they
• 20:00 - 20:30 when the Market's competitive and if it's inelastic then you think that there would be incentive for firms to collude but don't look after the fact because it's all they're always going to if they're colluding successfully they're always going to be doing that at the end of the day they'll end up in the elastic portion so again just to repeat if it's inelastic at the competitive price before you start this process process it makes collusion more likely if it's elastic at the competitive price it makes collusion less likely and that's that that's how the price elasticity of
• 20:30 - 21:00 demand plays into collusion okay the final factor and arguably most important in terms of uh in increasing the likelihood that collusion will occur has to do with barriers to entry think about it imagine two firms collude they somehow solve the prisoner's dilemma problem I don't know how they do it maybe they have help from government maybe uh maybe they're just able to pull it off through some sort of miracle and they are colluding um they've solved the prisoners dilemma they've gone through all these costs and then somebody else just says oh look at the two firms that are colluding I'll just enter the market charge lower
• 21:00 - 21:30 prices and take the entire Market from them basically in order for you to be able to collude you need High barriers to entry to keep the other firms out once you collude you don't need if other firms are entering then your collusion is going to be really hard to pull off and so that's the final Factor the higher the barrier to entry the more likely there is collusion the lower the barrier entry the less likely there is to have you're less likely you are to have