5. Chapter 17 Flashcards
What is an oligopoly?
Market structure in which only a few sellers offer similar or identical products
Key feature is tension between cooperation and self interest
Nike-Bauer and Reebok-CCM being the main producers of skates
What is game theory?
The study of how people behave in strategic situations
Strategic means situation where a person must consider how others may respond to the action she takes
Each firm in an oligopoly must act strategically
What’s a duopoly?
An oligopoly with only two members
What is a collusion and a cartel in oligopoly?
Collusion- an agreement among firms in a market about quantities to produce or prices to change
Cartel- a group of firms acting in unison, once a cartel is formed, the market is acting in monopoly
Oligopolists want to form cartels and earn monopoly profits but it is often impossible (arguing over who in the cartel gets more profit and laws against it)
What is the Nash equilibrium?
A situation in which economic actors interacting with one another each choose their best strategy given the strategies that the other actors have chosen
Ex: jack might want to produce more water to sell more and make more, but Jill will see this and want to make more too then the overall price of water goes down then they both make less, then equilibrium is formed page 351 example
How is oligopoly price related to monopoly price and competitive price?
When’s firms in an oligopoly individually choose production to maximize profit, they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost)
What are the two effects a well owner would weigh when considering raising production?
- The output effect- because price is above marginal cost, selling 1 more litre of water at the going price will raise profit
- The price effect- raising production will increase the total amount sold, which will lower the price of water and lower the profit on all other litres sold
If output effect is larger than price effect, we’ll owner will increase production
How does the number of sellers in an oligopoly affect the price and the change of the market?
As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level
What is the prisoners dilemma?
A particular “game”. Whereby two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Example of Bonnie and Clyde on page 354
What is dominant strategy?
A strategy that is best for a player in a game regardless of the strategies chosen by the other players
Confessing is a dominant stretchy for Bonnie
What are the two examples in which self-interest prevents cooperation and leads to an inferior outcome for the parties involved?
Advertising- if two company’s don’t advertise for same market they split the market, if both companies do advertise they split the market with lower profit
Figure 17.3 on page 358
Common resources- drilling two wells to get oil quicker and faster than other company is dumb because it decreases profit
Figure 17.4 on page 358
What is the one way to maintain cooperation?
The threat of penalty
Reassuring one another through multiple games that if one tried to up production the other will too and it will decrease profit for both
What is Canada’s competition act?
Contains civil and criminal provisions and restrains trade among competitors (reducing quantities, raising prices, price fixing)
What are three examples of controversial business practice?
- Resale price maintenance- prevents retailers from competing on price, company sellers DVDs to retailers for 100 but demands they sell them for 150
- Predatory pricing- firms with market power use power to raid prices above the competition levels (coyote air is monopoly in flights, new company comes in and has 20% of market, coyote cuts costs to drive new company out of market and have monopoly again)
- Tying- movie company offers avengers and hamlet together at a single price (avengers may be blockbuster and hamlet may be shit) they are tied together
Page 362-364
What are anticompetition laws used for?
Policy makers use them to prevent oligopolies from engaging in behaviour that reduces competition
These laws can be controversial
