Oligopoly Flashcards
Oligopoly
1) Small group of sellers + characterized by tension btwn cooperation + self interest
2) cooperation = allows them to act like on big monopolist BUT each motivated only by their own profit –> pulled apart
Collusion
an agreement among firms in a market about quantities to produce or prices to charge
Cartel
group of firms acting in unison
Why is it difficult for oligopolists to form cartels + earn monopoly profits?
1) disagreements over how to divide profit
2) anti-trust laws prohibit explicit agreements among oligopolists
Why won’t oligopolists reach monopoly prices on their own (without communication)
1) each will want to produce more –> grab more of the market –> have more profit BUTTTT as quantity they produce increases –> price falls
Nash Equilibrium
1) situation where economic actors interacting with one another choose best strategy based on given strategies others have chosen
Summary of effects under oligopoly
1) When individually choose production to max profit –> produce greater Q than monopoly but less than competitive
2) Price is lesser than monopoly BUT greater than competitive
Price vs output effect
Output effect = when price exceeds marginal cost –> selling one more gallon of water increases profit
Price effect = raising production increases total quantity sold –> declining price of water –> profit of other gallons sold declines
What happens as # of sellers in oligopoly grows
1) resembles a competitive market
2) price approaches marginal
Dominant Strategy
1) strategy that is best for a player in a game regardless of the strategies chosen by the other players
Example of oligopoly breaking down from lack of cooperation
OPEC = agreed to maintain certain level of production BUT everyone kept violating agreements –> price of oil tanked
Why do some cooperations stay intact
1) if cooperation/game is repeated multiple times SO penalty placed if anyone reneges
2) penalty –> maintain cooperation
What do antitrust laws do
1) prevent mergers that give firms excessive market power
What is resale price maintenance
1) Manufacturer sets minimum price retailers must charge for product –> can maintain stable prices across market + reduce price wars and ensure higher profit margins
2) Restricts competition + limits consumer benefits from potential price reductions
What is predatory pricing
1) dominant firm setting prices extremely low to drive competitors out of market
2) after rivals exit –> firms raise prices to recoup losses
3) in an oligopoly = large firms use predatory pricing to weaken smaller competitors + reduces competition
What is bundling
1) Selling multiple products together at discounted price –> makes it difficult for competitors to sell individual products at competitive rates
2) oligopoly –> uses bundling to lock in customers, increase market share, create barriers to entry
