Oligopoly Flashcards
Oligopoly
Small number of producers, common market structure
Herrindahl-Hirschman Index
HHI
Measure of the degree of market concentration
Square of market share
S^2
Duopoly
Oligopoly with only 2 firms
Collusion
Sellers cooperate to raise each other’s profit
Cartel
-Strongest form of collusion
-Agreement by several producers to obey output restrictions to increase profits
Non-Cooperative Behavior
Ignoring the effects of their actions on each other’s profits
2 outcomes
———————
1. Successful Collusion
2. Behaving non-cooperatively by cheating
Quantity Competition
- Firms are restricted in how much they wanna produce
- Avoid excessive competition
- Pricing above marginal cost and earning profits
Price Competition
- Firms produce perfect substitutes and can satisfy demand when P=MC
- Each firm will be compelled to engage in competition until price reaches marginal cost
Prisoners Dillena
-Interdependance decisions of 2 or more firms affect each other’s profits
- Game Theory study of behavior in situations of interdependence
Payoff
Reward received by a player in a game
Payoff Matrix payoff of each of the participants in 2 player game depends on both actions
Prisoners Dilemma
When both are worse off if they both cheat
Dominant Strategy
Player’s best action regardless of others action
Nash Equilibrium / Non-Cooperative Equilibrium
Each player chooses action that maximizes payoff, ignoring other
Tit for Tat
Playing cooperatively at first, then doing whatever other player did in previous period
Tacit Collusion
Firms limit production and raise prices to raise each other’s profits ( without formal agreement )
