CHAPTER 49 OLIGOPOLY

Question 1

Cartel

Answer 1

A formal agreement between firms to limit competition in the market, for example by limiting output in order to raise prices.

Question 2

Collusion

Answer 2

Collective agreements, either formal or tacit, between firms that restrict competition.

Question 3

Collusive oligopoly

Answer 3

A market with a high concentration ratio where a few interdependent firms cooperate, either formally or tacitly, to restrict competition.

Question 4

Concentrated market

Answer 4

A market where most of the output is produced by a few firms and where therefore the concentration ratio is high.

Question 5

Duopoly

Answer 5

An industry where there are only two firms.

Question 6

Game theory

Answer 6

The analysis of situations in which players are interdependent.

Question 7

Market conduct

Answer 7

The behaviour of firms, such as pricing policies, promotion of products, branding and collusion with other firms.

Question 8

Marketing mix

Answer 8

Different elements within a strategy designed to create demand for a product and profits for a firm.

Question 9

Non-collusive or competitive oligopoly

Answer 9

When firms in an oligopolistic industry compete amongst themselves and there is no collusion.

Question 10

Oligopoly

Answer 10

A market structure where there is a small number of firms in the industry and where each firm is interdependent with one another, creating uncertainty. Barriers to entry are likely to exist.

Question 11

Overt or formal collusion

Answer 11

When firms make agreements among themselves to restriction competition, typically by reducing output, raising prices and keeping potential competitors out of the market; cartels are one example of formal collusion.

Question 12

Payoff matrix

Answer 12

In game theory, shows the outcomes of a game for the players given different possible strategies.

Question 13

Predatory pricing

Answer 13

A pricing strategy where a firm lowers its prices when a new entrant comes into the market in order to force the competitor out of the market, and then putting prices back up again once this objective has been achieve.

Question 14

Price agreement

Answer 14

A type of formal collusion where two or more firms arrange to fix prices of their products.

Question 15

Price follower

Answer 15

A firm which sets its price by reference to the prices set by the price leader in a market.

Question 16

Price leadership

Answer 16

When one firm, the price leader, sets its own prices and other firms in the market set their prices in relationship to the price leader.

Question 17

Price war

Answer 17

A situation where several firms in a market repeatedly lower their prices to outcompete others firms; the objective may be to gain or defend market share.

Question 18

Prisoner’s dilemma

Answer 18

A game where, given that neither player knows the strategy of the other player, the optimum strategy for each player leads to a worse situation than if they had known the strategy of the other player and been able to cooperate and co-ordinate their strategies.

Question 19

Tacit or informal collusion

Answer 19

When firms collude without any formal agreement having been reached and where there is no explicit communication between firms and strategies; an example is price leadership.