Applications of the Core to Oligopoly
Oligopoly refers to a market in which a “few” producers sell a homogeneous product to “many” buyers. However, this terminology is misleading because some aspects of oligopoly appear even when there are two sellers and one buyer. The theory of the core is well suited for analyzing those situations treated in oligopoly theory not only for its new results but also because it forces a rigorous examination of several often neglected aspects of oligopoly. For example, with core theory it is necessary to prove in every case whether or not there will be group rationality (Pareto optimality) and whether or not there will be price discrimination. The absence of price discrimination is often taken for granted, but it should not be, because a seller may maximize his return by charging every buyer the highest price he would be willing to pay rather than go without the good altogether. Why does this not always happen?
KeywordsMarginal Cost Group Rationality Price Discrimination Infinite Horizon Limit Price
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