Oligopoly Flashcards
What is an oligopoly?
A market structure where a few firms dominate and hold the majority of market share.
Oligopoly does not exclude the presence of other firms in the market.
What are the four key characteristics of oligopoly?
- Products are generally differentiated
- High concentration ratio of supply
- Firms are interdependent
- There are barriers to entry
The concentration ratio indicates the percentage of market share held by a specific number of firms.
What does the kinked demand curve model explain?
Price rigidity and stability in oligopoly markets.
Particularly relevant when there are a few dominant firms.
What happens to demand above the kink in the kinked demand curve model?
Demand is highly elastic, meaning consumers are very responsive to price changes.
What occurs below the kink in the kinked demand curve model?
Demand is inelastic, meaning consumers are less responsive to price changes.
What is the concentration ratio?
A measure of the percentage of the total market that a specific number of firms have.
What is collusion in the context of oligopoly?
When firms make collective agreements that reduce competition.
What is a competitive oligopoly?
An oligopoly where firms do not collude.
What are the risks of collusion?
- Legal consequences
- Other firms breaking the cartel
- Prices being set undesirably
Collusion is illegal in many jurisdictions.
What conditions favor successful collusion?
- Few firms known to each other
- Similar costs and production methods
- Similar products
- Presence of a dominant firm
- Market stability
- High barriers to entry
What is a cartel?
A formal agreement between firms to mutually set prices.
Cartels may have legally enforced rules and penalties for violations.
What are the two main types of collusion?
- Overt collusion
- Tacit collusion
What is price leadership?
When one firm becomes dominant and other firms follow its pricing decisions.
What is barometric firm price leadership?
A situation where a firm is recognized for predicting market movements and others follow its lead.
What does game theory explore?
The reactions of one player to changes in strategy by another player.
What are the two strategies a firm could adopt in game theory?
- Maximin policy
- Maximax policy
What is a dominant strategy?
A strategy that results in the same solution for both maximin and maximax approaches.
What is Nash Equilibrium?
A situation where neither player can improve their position based on the other player’s expected decisions.
How does game theory explain price stability in oligopoly?
Firms tend to keep prices unchanged to minimize risk and maximize profits.
What is the prisoner’s dilemma?
A situation where two individuals must choose between cooperating or betraying each other, leading to a Nash equilibrium.
