Chapter 11: Oligopoly Flashcards
What is an Oligopoly?
A handful of firms producing all or most of a good or services supply
What is a Contestable Market?
A imperfect competitive industry that can be entered when prices and profits increase
What is a concentration ratio?
How much output is produced by an industries largest firms
An Oligopolist is …
a firm in a oligopoly
Market Share
percent of total market output of a firm
Product Differentiation
Features that make a product more unique or appealing than another
A Payoff Matrix
A table representing the risks and rewards of an alternative decision
Game Theory
Study of strategic decision making between firms
Price fixing occurs when..
Firms agree on what price a good sells at
Price leadership is…
A pattern allowing a firm to establish a market price for all firms
A Cartel is..
A group of firms agreeing to fixed prices and product output
Predatory Pricing is
reducing prices in order to drive out competition
The Herfindahl-Hirshman Index…
measures the industry concentration of firms, and their size
Determinants of Market Power include..
Number of Producers, size of firms, barriers of entry, and availability of substitues
What does a Concentration Ratio Measure?
Market Power
At what percent of concentration would a industry be considered a oligopoly?
60% or above
How would you measure Market Power?
by an industrys concentration ratio, or firm size
An Increase in Sales at Prevailing Market Price
reduces shares of the other oligopolists
An increase in sales at reduced prices..
expands the total market sales w/o reducing other oligopolies sales
In what ways can a oligopoly retaliate?
Increased Advertising, and Price Cuts
Price cuts force competition to what?
Cut prices, or accept a reduced market share
What would happen if a firm uses price cuts to increase their market share?
a general reduction in the market price
What does the Kinked Demand Curve demonstrate?
the interdependent behavior of oligopolys
The Shape of a Oligopoly’s demand curve depends on what?
the responses of its rivals to a change in the price of its own output
Demand curves will be kinked if what happens?
Oligopoly rivals match price reduction
What happens when rivals don’t match a reduction in price?
Sales would increase dramatically to the firm with the lowest priced good
What would happen if rivals match a reduction in price?
Monthly sales of the lowest-priced good would expand slightly
What would happen if rivals don’t match a increase in price?
Nothing
When would a rival oligopoly match a price increase?
when an industry wide price increase occurs
What would happen if rivals increased their prices?
Rivals may increase prices to gain additional prices; but risk losing demand
“Game Theory”
Oligopolists must consider potential responses of rivals when coming up with price / output strategies
Payoff Matrix
Summarizes profit consequences depending on a scenario
How is Expected profit (or losses) found?
by using a risk assessment
What prevents oligopolys from taking price rivalry too far?
threats of mutual destruction
Expected Payoff Formula
[ Probability of Matching x Loss from cut ] + [ Probability of Not Matching x Gain from cut]
Profits are maxed at what rate of output (Oligopoly)
MC = MR
Oligopolys try and mimic
Monopolys
How do Oligopolist avoid self-destructive behavior?
Maintaining maximized output and prices, and ensuring firms are content with their market shares
How do companys attain price leadership?
by reading industry publications and shifting- prices as needed
Oligopolys become cartels when what occurs..
production-sharing agreements
Market Share Allocation Formula
revenue / total sales
What barriers to entry do Oligopolists use to keep competitors out?
Patents, Distribution Control, Input Lock-ups, Mergers, Acquisition, Government Regulation,Non-Price Competition, Training, and Network Economies
