Oligopoly Flashcards
What are the distinguishing features of an oligopoly?
Natural or legal barriers that prevent the entry of new firms.
A small number of firms compete (this number is always countable).
What is the order of the four different market types in terms of how many firms are in the market, starting with the highest number?
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
Antitrust law
Because there are few firms in an oligopoly market, it is easy for the market to become a monopoly, e.g. through firms merging, or going bankrupt and leaving the market, etc.
What is a natural oligopoly?
Oil-producing firms are a natural oligopoly as they have the resources available to them to produce this product, and only a limited number of firms are able to enter the industry.
What is a duopoly?
A duopoly is where there are only two firms competing within a market. For example, in the computer chip market there is Intel and AMD.
This is a natural duopoly because it is cheaper to just have two firms in the market.
Very easy for one of the firms to become a monopoly if any drastic market changes arise.
Are supermarkets an example of an oligopoly?
Yes - there are few firms in the market all offering similar products and services. They are able to satisfy the demand so there is no entry/exit into the market. These firms satisfy the equilibrium.
In an oligopoly market…
There is no room for more firms in the industry, and less firms would mean that demand isn’t met.
What is game theory?
A tool for studying strategic behaviour - takes into account the expected behaviour of others and the mutual recognition of interdependence.
The Prisoners’ dilemma game illustrates the four features of a game. What are they?
- rules
- strategies
- payoffs
- outcome
What is the Nash equilibrium?
Where the outcome is the same for both parties involved.
The Nash equilibrium is a dominant strategy equilibrium, by which we mean the best strategy for each player is independent of what the other player does. Each firm looks out for its own self-interest.
What is an oligopoly price fixing game?
A game like the prisoners’ dilemma is played in duopoly. Firms collude to fix prices.
What is a natural duopoly?
A situation under which two firms can meet the market demand at the least cost.
What is the relationship between MC and ATC?
As long as MC is below ATC, it is pulling ATC down; when MC is above ATC, the ATC is pulled up.
How do firms achieve monopoly output?
Through collusion.
What happens if one firm cheats on a collusive agreement?
The firm who cheats will make an economic profit and the other firm will make an economic loss.
