Module 8

Question 1

Why do oligopolies exist?

Answer 1

Barriers to entry.

Question 2

What are the barriers to entry for oligopolies?

Answer 2

Economies of scale
Control of a key resource
Government

Question 3

What are the government imposed barriers to entry?

Answer 3

Patents
Licences
Restrictions on trade (tariffs and quotas)

Question 4

What are the three types of games that game theory looks at?

Answer 4

Static
Sequential
Repeated

Question 5

What is a static game?

Answer 5

all players move at the same time

Question 6

What is a sequential game?

Answer 6

One player moves first then the others follow.

Question 7

What’s a Four Firm Concentration Ratio?

Answer 7

US Census Bureau publishes the fraction of each industry’s sales accounted for by it’s four largest firms

Question 8

What four firm concentration ratio indicates an oligopoly?

Answer 8

Anything over 40%.

Question 9

What are some faults with the four firm concentration ratio?

Answer 9

Calculated nationally
- doesn’t include international players
- sometimes the local market is more relevant
Single classification of firms can exclude them from areas where they’re major players.

Question 10

What are the three characteristics of games?

Answer 10

Rules
Strategies
Payoffs

Question 11

How do we visually figure out how a static game is going to go?

Answer 11

We use a payoff matrix.

Question 12

What is a dominant strategy?

Answer 12

The best possible strategy for a given firm regardless of the other firm’s choices. i.e. no matter what their opponent choses, they would go with the dominant strategy. If their choice depends on the choice of the other firm, it’s not a dominant strategy.

Question 13

What’s Nash equilibrium?

Answer 13

A Nash equilibrium occurs when neither player has an incentive to change strategies considering the
strategy the other player is using.

Question 14

What’s a cooperative equilibrium?

Answer 14

The equilibrium that occurs if the firms cooperate, generally the best possible outcome for both.

Question 15

What’s the prisoner’s dilema?

Answer 15

Static game
Both firms pursue their own self interest and get the non-cooperative outcome which is generally worse than the cooperative outcome would have been.

Question 16

What kind of game is played over and over?

Answer 16

A repeated game.

Question 17

What happens with Nash equilibrium and repeated games that encourages firms to begin cooperating?

Answer 17

The losses from non-cooperation build up.

Question 18

How do firms encourage cooperation?

Answer 18

Explicit collusion
Implicit collusion
- price leadership
- retaliation (price match guarantees)

Question 19

How do we visually map a sequential game?

Answer 19

Decision trees.

Question 20

What’s a decision node?

Answer 20

The point on a decision tree where a decision has to be made.

Question 21

What’s a terminal node?

Answer 21

The end part of a decision tree where we get the outcome.

Question 22

What’s a subgame-perfect equilibrium?

Answer 22

A Nash equilibrium in which no player can make themselves better off by changing their decision at any decision node.

Question 23

What’s snipping in the context of auctions?

Answer 23

placing your bid at the last second to keep people from gaining market information about how valuable the item is to other people (which is important if they want to potentially resell the item).

Question 24

What are the five competitive forces in the 5 competitive forces model?

Answer 24

Existing firms
Potential entrants
Substitutes
Buyers (bargaining power)
Suppliers (bargaining power)

Question 25

In what ways do existing firms compete in an oligopoly?

Answer 25

Quality
Price
Name recognition
Better service
Longer warranties

Question 26

What behaviours do firms in an oligopoly engage in to mitigate the threat of potential entrants?

Answer 26

Setting lower prices to keep profits at a level that makes entry less attractive
Introducing new products to fill market niches
Advertising to create product loyalty
Lobbying the government to set up regulatory barriers

Question 27

How do we know which decision is best in a decision tree or payoff matrix?

Answer 27

We examine what the other firm is likely to do, and if they have a dominant strategy, and then we make a decision. In a decision tree it can be best to start at the terminal nodes and work backwards to see what the players will and should do.