Ch.13 - Oligopoly

Question 1

Oligopoly

Answer 1

Only a few sellers, each offering a similar or identical product to the others.

Question 2

Monopolistic Competition

Answer 2

Many firms selling products that are similar but not identical.

Question 3

Concentration ratio

Answer 3

A measure of the proportion of the total market share of a particular number of firms.

Question 4

What are characteristics of an oligopoly?

Answer 4

• relatively small number of dominant firms in the market
• each firm may offer a product similar or identical to the others
• e.g.: market for chocolate bars, crude oil (a few countries in the middle east control much of the world’s oil reserves)

Question 5

Differentiation

Answer 5

firms in oligopolistic market structures sell products that are similar but may seek to differentiate themselve in some way

Question 6

Market segment

Answer 6

= the breaking down of customers into groups with similar buying habits or characteristics.

Question 7

Interdependence

Answer 7

Oligopolistic markets are dominated by a few large firms - so are considered interdependent –> this means that what one firm does has some influence on the others and each firm may/may not react to the decisions of others

Question 8

What is a consequence of interdependence?

Answer 8

can be tension; each firm considers its own actions; they either decide to cooperate or act in self-interest

Question 9

Duopoly

Answer 9

= an oligopoly with only two members.
- It is the simplest type of oligopoly.

Question 10

Collusion

Answer 10

An agreement among firms in a market about quantities to produce or prices to charge

Question 11

Cartel

Answer 11

A group of firms acting in unison.
- once a cartel is formed, the market is in effect served by a monopoly

Question 12

What are the benefits of collusion for oligopoly firms?

Answer 12

• firms can increase profits by working together to keep prices high; by agreeing not to compete they can maintain their market power
• reduces uncertainty for firms involved; by colluding, firms can eliminate some uncertainty around what competitiors may do next, so creates a more stable market environment
• can help to reduce the risk of price wars between firms; and maintain higher prices rather than engaging in price wars (as in a competitive market - to gain market share which could be harmful to all firms and drive prices down to unsustabinable levels)

BUT..
collusion is harmful for consumers as they may end up paying higher prices than they would in a more competitive market

Question 13

Why is it difficult for oligopoly firms to collude?

Answer 13

• temptation to cheat on the agreement - to lower prices and gain larget market share –> “cheating the cartel”
• hard for firms to coordinate actions and ensure eveyone is folliwng the agreement –> there may be disagreements about pricing or how to divide the market up
• collusion is oftem illegal, firms can face significant fines and penalties if caught - this risk makes it difficult for firms to trust each other

Question 14

Nash equilibrium

Answer 14

a situation where each firm chooses their best strategy, given the strategies that all the others have chosen.

Question 15

what is the output effect?

Answer 15

because price is above marginal cost, selling more at the going price raises profits

Question 16

What is the price effect?

Answer 16

raising production will increase the amount sold, which will lower the price and the profit per unit on all units sold.

Question 17

Game theory def & what is it useful for?

Answer 17

= the study of how people behave in strategic situations.

• it is useful for understanding the bhv of oligopolies –> since firms in an oligopolistic market must act strategically, and based on the decisions made by other firms in the market it creates a payoff scenario where firms must put themselves in the position of other players before deciding their strategy

Question 18

Payoff matrix

Answer 18

a table showing the possible combination of outcomes (payoffs) depending on the strategy chosen by each player.

Question 19

Prisoner’s dilemma

Answer 19

a game which illustrates why cooperation is difficut to maintain even when it is mutually beneficial

• Often people (firms) fail to cooperate with one another even when cooperation would make them better off.

Question 20

Dominant strategy

Answer 20

the best strategy for a player to follow regardless of the strategies chosen by the other players.

• Cooperation is difficult to maintain, because cooperation is not in the best interest of the individual player. –> cooperation is individually irrational

Question 21

cooperative game theory

Answer 21

each player knows the set of outcomes or agreements and each player has preferences over these outcomes.

Question 22

Non-cooperative game theory

Answer 22

assumes players have a series of strategies they could use to gain an outcome and that each player has a preference over their desired outcome

Question 23

what is a tacit collusion?

Answer 23

occurs when firm behaviour results in a market outcome that appears to be anti-competitive but has arisen because firms acknowledge that they are interdependent.

Question 24

Brand proliferation

Answer 24

a strategy designed to deter entry to a market by producing a number of products within a product line as different brands.

Question 25

Resale Price Maintenance (aka fair trade)

Answer 25

Occurs when suppliers (like wholesalers) require retailers to charge a specific amount.

Question 26

Predatory pricing (aka destroyer pricing)

Answer 26

Occurs when a large firm begins to cut the price of its product(s) with the intent of driving its competitor(s) out of the market.

Question 27

Tying

Answer 27

Occurs when a firm offers two (or more) of its products together at a single price, rather than separately.