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Oligopoly: Supply and Demand Problem

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America's Water Meter Industry is dominated by four firms: Rockwell, Badger, Neptune and Hersey. Rockwell has 35% market share, and the remaining share the rest. Demand is very inelastic and there is barrier to entry due to economies of scale. The firms, fearing that profits may fall to competitive levels have, have set prices cooperatively. They've played "repeated games". There is no attempt by any firm to undercut price and each is satisfied with its market share.

a. Use graphs to explain the concepts mentioned here.
b. Explain all the economic terms used here, in relation to oligopoly.
c. Explain in Olipolistic terms, and with graphs, what is really happening.
d. Shoud the US anti-trust laws be invoked in industries like this.

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Solution Summary

This solution helps with a supply and demand problem. It using graphs to explain the concepts. It also explains the economic terms, olipolistic terms and US anti-trust laws.

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Answers:
An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high (i.e. a large % of the market is taken up by the leading firms).Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets. The ongoing interdependence between businesses can lead to implicit and explicit collusion between the major firms in the market. Collusion occurs when businesses agree to act as if they were in a monopoly position.
Thus the firms in the oligopolistic market face two differing outcomes, depending on whether they compete with other firms or collude with them. If the firms in the oligopolistic industry collude, the outcome will resemble a monopoly. As shown in the Figure, price will be Pm and there will be substantial economic profits. Indeed, these economic profits are ...

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