Oligopoly

Question 1

Oligopoly

Answer 1

Market structure dominated by small # of firms

Question 2

Characteristics of Oligopoly

Answer 2

Profit of a firm depends heavily on actions of other firms

Can affect market prices but do not have monopoly

Question 3

Measuring Oligopoly

Answer 3

Herfindahl-Hirschman Index (HHI)

Sums the squares (^2) of each firm’s market sales share

Question 4

HHI Guidelines

Answer 4

HHI < 1000 indicates strong competition

1000 to 1800 indicates some competition

> 1800 indicates oligopoly

Question 5

Duopoly

Answer 5

Form of oligopoly consiting of only two firms

Each firm understands that limiting production can lead to higher profits

Question 6

Collusion in Oligopoly

Answer 6

When firms cooperate to raise each other’s profits

Strongest form is cartel, firms agree to restrict output to increase joint profits

Question 7

Outcomes in Oligopoly

Answer 7

Two main outcomes:

1. Successful collusion
2. Noncooperative behavior (cheating)

Capacity constraints make collusion easier

Question 8

Game Theory in Oligopoly

Answer 8

Study of behavior in situations of interdependence

Tries to predict outcomes in strategic situations (ex: oligopolies)

Question 9

Product Differentiation in Oligopoly

Answer 9

Attempt by firms to convince consumers that their product is different from others in the industry

Ex: “our toothpaste is better, it has carbon!”

Question 10

Price Leadership

Answer 10

One firm sets its price first, other firms follow

Ex: General Motors

Question 11

Example of Oligopoly

Answer 11

Coke and Pepsi (cola drinks market)

Both have zero marginal cost and fixed costs of $100,000, consumers view them as perfect substitutes

Question 12

Challenges to Tacit Agreements

Answer 12

Tacit Agreement: informal agreements/understandings where firms in oligopoly behave in mutually beneficial way without directly making a formal agreement

Challenges:
- Presence of few firms with similar products
- Buyers with significant buying power