Chapter 7.6 Flashcards
Implications of interdependence for the behavior of oligopolistic firms
Strategic behavior
Conflicting incentives
Game theory
A mathematical technique analyzing the behavior of decision-makers who are dependent on each other, and who display strategic behavior
Payoff matrix
The combinations of pricing strategies and their corresponding profit outcomes for two firms
What does the Nash equilibrium show?
There is sometimes a conflict between the pursuit of individual self-interest and the collective firm interest
Price war
When oligopolistic firms use price competition and their rivals match them so that all firms end up with lower prices and lower profits
Types of oligopolies
Collusive oligopoly
Non-collusive oligopoly
Collusive oligopoly
Situations where firms agree to collude, forming an agreement to limit competition, increase market power and profits
What is the key objective of a cartel?
To limit competition between member firms and attempt to maximize joint profits
Which market structure is a collective cartel similar to?
Monopoly
Difficulties in forming a cartel
Incentives to cheat
Cost difference between firms
Number of firms
Possibility of a price war
Non-collusive oligopoly
Oligopolistic firms that do not collude in any way in order to fix or coordinate prices and limit competition
Three points about firms in non-collusive oligopolies
Firms that do not collude are forced to take into account the actions of their rivals in making price decisions
Even though the firms do not collude, there is still price stability
Firms do not compete with each other on the basis of price
Concentration ratio
An indication of the percentage of output produced by the largest firms in an industry
Market concentration
How much of an industry is dominated by the largest firms in that industry
