Oligopoly
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Economists have been discussing oligopoly prices and profits since the 1840's. In principle, the oligopoly's profits could never be higher than those of a monopoly -- since the monopoly chooses the price that maximizes industry profits. A price higher than the monopoly price would just reduce profits (by driving away too many customers), so we wouldn't expect to see a price above the monopoly price. At the other extreme, in the long run, no industry -- and in particular no oligopoly -- could be stable with prices and profits lower than those of a P-competitive industry in long-run equilibrium: zero economic profits and the supply-and-demand equilibrium price. But where in this range will the oligopoly's prices settle?
There are four major hypotheses about oligopoly pricing:
1. The oligopoly firms will conspire and collaborate to charge the monopoly price and get monopoly profits.
2. The oligopoly firms will compete on price so that the price and profits will be the same as those of a P-competitive industry.
3...