chapter 12 Flashcards
Competition policies
forbid agreements between competitors that reduce
quantities or raise prices (for example cartels, price fixing).
Resale price maintenance
A manufacturer imposes lower limits on the prices retailers can charge.
Predatory pricing
A firm cuts prices to prevent entry or drive a competitor out of the market, so that it can charge monopoly prices later.
Tying
A manufacturer bundles two products together and sells them for one price.
An oligopoly
is a market structure in which only a few sellers offer similar or identical products.
In oligopolistic markets,
there might be many firms, but sales are dominated
by a small number of firms.
The market share is
the percent of total sales in an industry generated by a particular company, calculated by taking the company’s sales over the period and dividing it by the total sales of the industry over the same period
The concentration ratio
is the proportion of total market share accounted for
by a particular number of firms.
The Herfindahl-Hirschman Index (HHI) is
a measure of market concentration to estimate the degree of competition within an industry.
Oligopolistic firms are interdependent
- The actions of any one seller in the market can have a large impact on the profits of all the other sellers.
- Firms also consider actions and reactions of rivals.
A duopoly is
an oligopoly with only 2 members.
Collusion is
an agreement among firms in a market about quantities to produce or prices to charge.
A cartel is
a group of firms acting in unison.
a Nash equilibrium. (when two firms produce the same quantity + higher profit)
- A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen.
- No economic actor has an incentive to make a different decision
Game theory is
the study of how people behave in strategic situations.
Strategic decisions are
those in which each person, in deciding what actions to take, must consider how others might respond to that action.
A payoff matrix is
a table showing the possible combination of outcomes (payoffs) depending on the strategy chosen by each player.
A dominant strategy is
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
The prisoner’s dilemma is a type of ”game” in which:
- Each player has an incentive to choose an action that benefits itself at the other player’s expense.
- When both players act in this way, both are worse off than if they had acted cooperatively.
(illustrates why cooperation is difficult to maintain even when it is mutually beneficial.)
examples of the prisoner’s dilemma
Advertising
Common resources
arm race between military superpowers
Tacit collusion:
when firm behavior results in a market outcome that appears to be anti-competitive but has arisen because firms acknowledge they are interdependent
Simultaneous move games:
Games where players make decisions independently and must determine their strategies without knowledge of what 3the other has chosen
Sequential move games:
Games where players make decisions in sequence with some players able to observe the strategic choices of others.
Firm X has a first-mover advantage:
By launching the liquid version, firm Y will be forced to choose the powder version and firm
X will have the highest profits.
Entry barriers
limit new competitors from entering the market.
