Notes
Outline
The competitive spectrum
The prisoners’ dilemma.
Two suspects – Smith and McAlpin – apprehended for bank robbery.
The prisoners’ dilemma.
Difficulty of coordination.
Oligopoly pricing.
The Cournot model.
Nash equilibrium:
The Cournot model.
The Lerner index of market power.
Concentration indices.
Structuralist view:  infer market power from market structure (meaning: number of firms).
Concentration indices.
N-firm concentration ratio.
Concentration indices.
Hirschman-Herfindahl Index (HHI).
Concentration indices.
Oligopoly pricing.
Oligopoly behavior.
The Harvard School
Oligopoly behavior.
The Chicago School
Oligopoly behavior.
Appraising oligopoly.
Why do we like perfect competition?
The last unit of output is earning exactly the opportunity cost of the resources that went into it.
Static resource allocation.
Appraising oligopoly.
Is the setting of optimal price and quantity the only economic problem firms are trying to solve?
The “inhospitability tradition.”
Example: Can collusion in high-throughput industries (like steel) also lower costs by reducing uncertainty?
Appraising oligopoly.
Economic growth:
Secular increase in output.
Lower prices.
Creation of new products.
Development of new technologies.
Schumpeterian competition.
Schumpeterian competition.
Schumpeterian competition.
The “Schumpeterian hypothesis.”
Do big firms (or firms with market power?) innovate more than small firms?
A relatively confused and arid debate.
Empirical evidence:  oligopolies are more innovative than either perfect competitors or monopolists.
Do firms innovate well because they are big – or do they get big because they innovate well?