Increasing Marginal Utility

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Oligopoly

Blogging from the phone. Not quite set up at my new place for internets.

A mattress salesman lectured me on economics today. He was the type of guy who had just enough economics education to get himself in trouble. He started going off on current events after finding out my job. I didn’t argue much with him because I wasn’t in the mood, but the conversation reminded me how bad the textbook presentation of oligopoly is.

The salesman claimed that fuel efficient cars were not being sold because of the market power of the big three. I responded that I didn’t think that was too plausible given the presence of Korea and Japan, at which point he correctly pointed out that 8 or 9 firms still counts as an oligopoly.

So… Yes. That is true, but it doesn’t mesh well with our best modern understanding of oligopoly. Simplistic collusion models and stupid kinked demand curve models were thrown out long ago. Perfect competition assumptions give you better predictions than those models.

We can do better than perfect competition of course. But that involves Stupid Game Theory Tricks, with all of their prediction neutering qualifying and equivocating.

The problem is of course that there isn’t really a way around doing Stupid Game Theory Tricks to make progress on the issue, because game theory is the closest tool we have for getting to the core of the question.

But now we’re back to what to teach the public and undergrads about what baseline mental model to use when thinking about a real life oligopoly. Fortunately some textbooks are doing what I think we should be doing.

Which is: set up prisoner’s dilemma and talk through the barriers for collusion. If the barriers sound high, assume perfect competition as your baseline explanation.

I don’t think there is any reason to believe it would be easy for firms as diverse as Kia, GM, and BMW to be able to collude. This would imply that what we should assume is that car manufacturers “failed” to sell green cars is people didn’t want them given their price.

Perhaps this may sound banal, but I am under the impression that most people with a limited economics background believe that whenever an industry has the textbook appearance of an oligopoly, you should assume that it will behave as a slightly less bad version of a monopoly, when that just isn’t true.

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2 responses to “Oligopoly

  1. Daniel Kuehn January 6, 2014 at 5:21 am

    Hell, even monopolies aren’t always slightly less bad versions of a monopoly.

    When it comes to size related issues I think it’s pretty obvious that the biggest problems that industries like the car industry run into are organizational.

  2. Daniel Kuehn January 6, 2014 at 5:24 am

    How does he even get there with a textbook oligopoly argument? I’m trying to think of ways that raw market power will keep you from getting things like green tech. The only intuition I have for the bad that comes from raw market power is that we’d have more expensive green tech than we should.

    As a non-IO guy the other intuition I have from the raw market power models is that R&D is something you do especially when you are producing at very large scales. Even given a naive monopoly/oligopoly model I wouldn’t naturally assume we’d have less green tech for that reason alone.

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