Oligopoly Flashcards
IBI
Characteristics of an Oligopoly
- Interdependence
- Barriers to Entry
- Information
Cite some barriers to entry in an oligopoly
- Large economies of scale
- Scarce resources
- Increase advertising
- Innovations
KCSB
Oligopoly Theories
- Kinked Demand Curve Model / Sweezy’s Model
- Cournot Model
- Stackelberg Model
- Bertrand Duopoly Market
Used to explain the price inflexibility in oligopoly
Kinked Demand Curve Model / Sweezy’s Model
Used when prices change very rarely.
Kinked Demand Curve Model / Sweezy’s Model
This theory assumes that when a firm lowers price, everyone lowers price to avoid losing customers and market share.
Kinked Demand Curve Model / Sweezy’s Model
When a firm raises its price, none of the rival firms would raise its price.
Kinked Demand Curve Model / Sweezy’s Model
FDBB
Characteristics of a Kinked Demand Curve Model / Sweezy’s Model
- Few firms in the market
- Differentiated products
- Believes rivals will cut their prices in response to a price reduction
- Barriers to entry exists
Used when firms produce identical or standardized products and don’t collude.
Cournot Model
One firm must determine the quantity they must sell at the same time that the other firms decide what quantity they would sell.
Cournot Model
Here, firms choose their quantities only once.
Cournot Model
FPBB
Characteristics of Cournot Model
- Few firms in market
- Produce either differentiated or homogenous products
- Believes that rivals will hold their output constant if it changes output
- Barriers to entry exists
In this model, one firm serves as the the industry leader.
Stackelberd Model
FPSOB
Characteristics of Stackelberg Model
- Few firms in the market
- Produces either differentiated or homogeneous products.
- Single firm chooses an output quantity before others
- Other will take the given output and choose outputs that maximize profits
- Barriers to entry exists
What’s the difference between Cournot Model and Stackelberg Model?
Cournot - Firms choose simultaneously
Stackelberg - Firms choose sequentially
It’s when one firm determines the profit maximizing quantity and the other firms react to that quantity.
Stackelberg Model
It’s when two firms make simultaneous choices.
Cournot Model
It examines price competition among firms that produce highly substitutable goods.
Bertrand Duopoly Market
FIEPB
Characteristics of Bertrand Duopoly Market
- Few firms in the market
- Identical products at a constant marginal cost
- Engages in price competition and reacts optimally
- Perfect information and no transaction costs
- Barriers to entry exists
In this model, the firms select the price that will maximize profits
Bertrand Duopoly Market
In this two models, the focus is on quantity.
Cournot Model and Stackelberg Model
What do you call when firms collude?
Collusive Oligopoly
It often results to competition among firms.
Non-collusive Oligopoly
It’s when participants act more like a monopoly and enjoy the benefits of higher profits.
Collusion
Types of Collusion
Covert
Tacit
It occurs when firms try to hide the results of their collusion.
Covert
It arises when firms act together but there’s no agreement among themselves.
Tacit
An analytical guide or tool for making decisions in situations involving interpendence.
Gane Theory
It is any decision-making situation in which people compete with each other for the purpose of gaining the greatest individual pay-off.
Game
It attempts to rake into consideration the interactions between the participant and their behavior to study the strategic decision-making between rational individuals
Game Theory
ZPN
Types of Games according to Outcome
Zero-sum Games
Positive-sum Games
Negative-sum Games
SSOR
Games according to how players decide their moves
Simultaneous-move games
Sequential-move games
One-shot games
Repeated games
One player’s gain is another player’s loss
Zero-sum games
Games with the potential for mutual profit.
Positive-sum games
Games with the potential for mutual loss.
Negative-sum games
Exists if you make a decision without knowing what other players decided.
Simultaneous-move games
Everybody except the player who moved first gets to observe their rival’s decision before making their own decision.
Sequential-move games
Played only once, not repeated by other players.
One-shot games
Players know that the game is played again over a time period.
Repeated games
A strategy when a player attempts to earn the maximum possible benefit available.
Maximax
It’s often seen as naive since it assumes a highly favorable environment for decision making.
Maximax
A strategy where a player chooses the best of the worst pay-off.
Maximin
It’s commonly chosen when a player can’t rely on the other party to keep any agreement that has been made.
Maximin
It’s the best outcome irrespective of what the other player chooses.
Dominant strategy
It’s the solution to a game involving two or more players who want the best outcome for themselves and must take the actions of others into account.
Nash Equilibrium
When this is achieved, players can’t improve their pay-off by changing their strategy.
Nash Equilibrium
It is the best strategy assuming that the other party has chosen a strategy and will not change it.
Nash Equilibrium
What happens when firms realize the strategy that leads to Nash Equilibrium?
They may revert to using randomized strategies - haphazard actions to keep rivals from predicting their strategic moves.
