11.3 Oligopoly and Game Theory Flashcards
What is a oligopoly?
An industry that contains two or more firms, at least one of which produces a significant portion of the industry’s total output.
What kind of concentration ration reflects an oligopolistic market?
Whenever there is a high concentration ratio for the firms serving one particular market, that market is oligopolistic.
How is an oligopoly similar to a monopoly and a monopolistic competition?
The market structures of oligopoly, monopoly and monopolistic competition are similar in that firms in all these markets face negatively sloped demand curves.
How does an oligopolist maximize its profits?
Like firms in other market structures, an oligopolist that wants to maximize its profits produces the level of output where its marginal revenue equals its marginal cost.
Why is determining the correct level of output for a oligopolist more complicated then other kinds of firms?
But determining this level of output is more complicated for an oligopolist than it is for any other kind of firm because the firm’s marginal revenue depends importantly on what its rivals do.
The general point is that determining the level of output that maximizes profits iscomplicated for an oligopolistic firm because it must consider its rivals’ likely responses to its actions.
What is strategic behavior?
Behaviour designed to take account of the reactions of one’s rivals to one’s own behaviour.
What is the basic dilemma of a oligopoly?
For the small number of firms in an oligopoly, the incentives are the same. Firms can either cooperate (or collude) in an attempt to maximize joint profits, or they can compete in an effort to maximize their individual profits. Not surprisingly, the decision by one firm to cooperate or to compete will depend on how it thinks its rivals will respond to its decision.
What is the cooperative (collusive) outcome
A situation in which existing firms cooperate to maximize their joint profits.
What is the non-cooperative outcome?
An industry outcome is reached when firms maximize their own profit without cooperating with other firms.
What is the best course of action within a cooperative outcome?
If the firms are at such a cooperative outcome, it will usually be worthwhile for any one of them to cut its price or to raise its output, so long as the others do not do so. However, if every firm does the same thing, they will be worse off as a group and may all be worse off individually.
What is game theory?
The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions.
What kinds of questions do we ask in game theory?
“What will the other firms do in each of these cases, and how will their actions affect the profitability of whatever decision I make?”
When game theory is applied to oligopoly…
The players are firms, their game is played in the market, their strategies are their price or output decisions, and the payoffs are their profits.
What is a duopoly
a two-firm oligopoly,
What is Nash equilibrium?
An equilibrium that results when each player is currently doing the best it can, given the current behaviour of the other players.
