ECON 101: Chp 14 - oligopoly Flashcards
describe an oligopoly
lies between perfect competition and monopoly
the firms in an oligopoly might product an identical profit and compete only in price or they might produce a differentiated product and compete on price, product quality, and marketing
an oligopoly is a market structure in which:
- natural or legal barriers prevent the entry of new firms
- a small number of firms compete
define a duopoly
an oligopoly market with 2 firms
how does a legal oligopoly arise?
arises when a legal barrier to entry protects the small number of firms in a market
an oligopoly consists of firms that have a ___ share of the market
large
what are 2 characteristics of firms in an oligopoly?
- interdependent
- temptation to cooperate to increase their joint econoimc profit
describe interdependence in an oligopoly
each firm’s actions influence the profits of all the other firms
describe the temptation to cooperate in an oligopoly
when a small number of firms share a market, they can increase their profits by forming a cartel and acting like a monopoly
define a cartel
a group of firms acting together to limit output, raise price and increase profit
are cartels illegal
yes
a market in which the HHI exceeds 2,500 is
an oligopoly
define game thoery
a set of tools for studying strategic behaviour
what’s strategic behaviour
behaviour that takes into account the expected behaviour of others and the recognition of mutual interdependence
define a payoff matrix
a table that shows the payoffs for every possible action by each player for every possible action by each other player
what are the 4 common features of a game
- rules
- strategies
- payoffs
- outcome
what’s the nash equilibirum
player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A
how to find the nash equilibrium
compare all the possible outcome associated with each choice and eliminate those that are dominated (not as good as some other choice)
what’s the dominant-strategy equilibrium
an equilibrium in which the best strategy of each player is to cheat regardless of the strategy of the other player
define a duopoly
an oligopoly with 2 firms
define a collusive agreement
an (illegal + secretive) agreement between 2 or more producers to form a cartel to restrict output, raise price, and increase profits
what are the 2 strategies firms in cartels use?
- comply - firm carries out the agreement
- cheat - firm breaks the arrangement to its own benefit and to the cost of the other firm
what are the 4 possible combinations of actions for the firms in cartels?
- both firms comply
- both firms cheat
- firm a complies and firm b cheats
- firm a cheats and firm b complies
how to maximize profit for an oligopoly
(1) firms must agree to restrict output to the rate that makes the industry marginal cost and marginal revenue equal - firms collude to produce the monopoly profit-maximizing output and divide the output equally between themselves - maximum total profit that firm collusion is the economic profit made by a monopoly
(2) one firm cheats on the collusive agreement. industry output is larger than the monopoly output and the industry price is lower than the monopoly price - the total economic profit made by industry is smaller than the monopoly’s economic profit
(3) if both firms cheat the price lowers and output increases (as far as it can without incurring economic loss). each firm makes zero economic profit. (firms makes same output and same price)
why do firms have the incentive to cheat?
when price is greater than marginal cost
define a cooperative equilibrium
players make and share the monopoly profit is possible
what’s the smallest and largest penalty for punishment in a cooperative equilibrium (repeated game)
smallest penalty = “tit for tat strategy”
largest penalty = “trigger strategy”
define a tit for tat strategy
strategy where a player cooperates in the current period if the other player in the previous period but cheats in the current period of the other player cheated in the previous period
define the trigger strategy
strategy in which a player cooperates if the other player cooperates but plays the Nash equilibrium strategy forever thereafter if the other player cheats
in a duopoly which strategy keeps both players cooperating and making monopoly profit?
tit for tat strategy
in tit for tat strategy, firms have an incentive to ___ to the monopoly price
stick
how can a price war break out?
- fluctuations in the demand which lead to fluctuations in market price - sometimes when price changes it might seem to one of the firm that the price has fallen bc the other firm has cheated
2.entry of small number of firms in to an industry that had previously been a monopoly
define a contestable market
a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants
can a sequential contestable market behave as if it were a competitive market
yes even though it can appear to be uncompetitive in the HHI
define limit pricing
sets the price at the highest level that inflicts a loss on the entrant - any loss is big enough to deter entry so it is not always necessary to set the price as low as the competitive price
what’s a sequential game
if 2 firms play a sequential game - 1 firm makes a decision at the first stage of the game and other makes a decision at the second stage
define an anti-combine law - what’s the use?
law that regulates oligopolies and prevents them from becoming monopolies or behaving like monopolies - can work in the social interest to maximize total surplus or in the self-interest of producers to maximize producer surpluses
what’s the competition act of 1986
sets our canada’s anti-combine law and establishes a competition bureau and competition tribunal
criminal activity is handled by the ____, violations of a non-criminal nature are examined by the _____
courts
competition tribunal
