Author Question: In the model of an oligopoly with identical (homogeneous) products, what is the price likely to be? ... (Read 78 times)

shofmannx20 · **on:** Jun 29, 2018

In the model of an oligopoly with identical (homogeneous) products, what is the price likely to be?

What will be an ideal response?

Question 2

Cigarette advertising on our nation's radio and television stations has been prohibited for more than the past three decades by federal law.

What is curious about this law is that it came into being not just because of the lobbying efforts of American Medical Association but also by the tobacco industry. Use economic logic to explain this apparent paradox.

abro1885 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

In an oligopoly with identical products, firms engage in tough competition in trying to gain market share. As a result, the market outcome is the same as it would be in a perfectly competitive industry: price equals marginal cost. This competitiveness comes from the fact that any one firm can steal all of the market from the other by dropping price only slightly. This incentive to undercut other firms' prices leads all firms to drop their prices to marginal cost.

Answer to Question 2

The tobacco industry has been dominated by a handful of firms for many decades and advertised heavily prior to the passage of this law. To survive, each firm responds in kind. If one firm drops out of the race, it will certainly lose out. Advertising of this sort may not increase demand for the product or improve profitability for the industry. Instead, it is often a zero sum gamea game in which the sum of the gains equals the sum of the losses. Tobacco company executives likely realized this zero sum game character of their advertising efforts and rightly understood that the only way to increase industry-wide profits would be if everyone were prevented from advertising. This could only be achieved through law.