Oligopoly Flashcards
Oligopoly
A few sellers in a market
actions of one seller have a large impact on everyone else
Game Theory
the study of how people behave in strategic situations
strategic situations=looking at how other people will respond in a situation
The strategic solutions in oligopolies
Each firm knows that profit depends on how much they produce and how much the other firms produce
Must consider how a decision will affect the production decisions of other firms in a market
When are oligopolies best off?
when they cooperate together and act as a monopoly
producing a small amount of output at a price above the marginal cost
Collusion
Agreement among firms in a market about quantities to produce or prices
looking to find the outcome that will maximize total profit
Cartel
A group of firms acting in unison
What does a cartel agree on?
total level of production, the amount produced by each member
What does a cartel agree on?
total level of production, the amount produced by each member
Do agreements often be made with cartels?
No
What happens when oligopolists decide to pursue their own interests?
they produce more than the monopoly quantity, charge a price lower than the monopoly price, and earn total profits less than the monopoly profits
Nash equilibrium
A situation in which economic actors interacting with one another each chose their best strategy given the strategies that all the other actors have chosen
What is the oligopoly price?
Less than the monopoly price but greater than the competitive price
What happens when the size of a cartel increases?
reaching and enforcing an agreement becomes more difficult
The output effect
price is above marginal cost, selling one more of the goods at the going price will raise profit
The price effect
Raising production will increase the total amount sold, lowers the price of the good and lowers the profit from all other gallons sold
What happens when the output effects is bigger than the price effect?
the production of the good will be increased
What happens when the price effect outweighs the output effect
the production of the good will not be raised
What happens when the number of sellers in an oligopoly grows?
an oligopolistic market resembles a competitive market
the price approaches marginal cost, the quantity produced approaches the socially efficient level
Prisoners’ Dilemma
A particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it’s mutually beneficial
Dominant Strategy
A strategy that is best for a player in a game regardless of the strategies chosen by other players
When oligopolies collude
they make high profits but consumers of the product are worse off
What is equilibrium quantity in markets characterized by oligopoly (where it does lie between monopoly/perfect competitive markets?)
higher than in monopoly markets and lower than in perfectly competitive markets
What happens when the number of firms in an oligopoly increases?
the price approaches marginal cost
the quantity approaches the socially efficient level
