Lecture 11 - Oligopoly

Question 1

Oligopoly

Answer 1

A market system in which a small number of interdependent firms compete; products are heterogeneous or homogeneous; substantial, yet potentially surmountable barriers to entry exist;

Question 2

True or False: if economies of scale are exhausted at a low level of output, the market is likely to be an oligopoly

Answer 2

False; if economies of scale are exhausted at a high level of output, the market is likely to be an oligopoly

Question 3

Four-firm concentration ratio

Answer 3

the fraction of an industry’s sales attributed to its four largest firms

Question 4

When, according to the four-firm concentration ratio, is a market considered an oligopoly?

Answer 4

When the four-firm concentration ratio is over 40%

Question 5

3 weaknesses of the four-firm concentration ratio

Answer 5

1. Does not include goods and services exported by foreign countries to the US
2. Calculated nationally, when some markets are highly localized
3. Definition of the market is critical

Question 6

Game theory

Answer 6

the study of how people make decisions in situations in which attaining their goals depends on their interactions with others

Question 7

True or False: There are no unconditional profit-maximizing strategies in oligopoly game theory

Answer 7

True

Question 8

What characteristics do all games share?

Answer 8

1. Rules
2. Strategies
3. Payoffs

Question 9

Rules

Answer 9

determine allowable actions

Question 10

Strategies

Answer 10

actions that players may make to attain their objectives

Question 11

Payoffs

Answer 11

The return to players arising out of the intersection of strategies

Question 12

Duopoly

Answer 12

An oligopoly with only two firms

Question 13

Dominant Strategy

Answer 13

a particular player’s strategy is optimal, regardless of the strategies selected by rivals

Question 14

Nash Equilibrium

Answer 14

No player can improve its payoff by unilaterally deviating from its strategy, given the strategies chosen by others

Question 15

Collusion

Answer 15

An agreement among firms to charge the same price or to otherwise not compete

Question 16

True or False: Collusion is illegal under antitrust law

Answer 16

True

Question 17

Non-cooperative equilibrium

Answer 17

players strictly pursue their own self interest

Question 18

Cooperative Equilibrium

Answer 18

An equilibrium in a game where players cooperate to increase their mutual payoff

Question 19

Is Nash equilibrium non-cooperative or cooperative?

Answer 19

Non-cooperative

Question 20

Prisoner’s dillemma

Answer 20

A game in which pursuing dominant strategies results in non-cooperation that leaves all players worse off

Question 21

price-match guarantee

Answer 21

form of implicit collusion which punishes a competing firm for charging a lower price

Question 22

Price Leadership

Answer 22

form of implicit collusion in which one firm in an oligopoly announces price and others match the change

Question 23

Cartel

Answer 23

A group of firms that collude by agreeing to restrict output to increase prices and profits

Question 24

True or False: Cartels are inherently unstable

Answer 24

True

Question 25

How are sequential games solved?

Answer 25

Backward induction

Question 26

Subgame-perfect Nash equilibrium

Answer 26

a Nash equilibrium in which no player can improve its payoff by changing its decision at any decision node