Oligopoly pt3

Question 1

Why do many cartels break down?

Answer 1

-Falling market demand in a recession
-Overproduction by some members
-Exposure by competition authorities
-Entry of non-cartel firms into the industry

Question 2

Penalties for cartels

Answer 2

Fines and imprisonment

Question 3

Potential benefits from collusion

Answer 3

-Increase in general industry standards can bring social benefits
-Can produce fairer prices for producer cooperatives in lower and middle income countries
-Profits have value e.g. capital investment, research and development

Question 4

Costs of collusive behaviour

Answer 4

-Damages consumer welfare - Loss of consumer welfare and hits lower income families
-Absence of competition hits efficiency - X-inefficiencies leads to higher costs and there is a loss of allocative and dynamic efficiency
-Reinforces the cartel’s monopoly power - Harder for new businesses to enter which reduces market contestability

Question 5

Game theory

Answer 5

The study of how people and businesses make decisions in strategic situations. Oligopoly uses game theory to model the actual behaviour of businesses in concentrated markets.

Question 6

What does game theory consist of

Answer 6

-Players
-Strategies
-Payoffs
-Might involve some form of pre commitment

Question 7

Simultaneous games

Answer 7

When players make their decision at the same time and you dont know the choices of other when making their choices e.g. rock paper scissors.

Question 8

Sequential games

Answer 8

Players take alternative turns to make their choices e.g. chess. This is important as there may be a first mover advantage or disadvantage.

Question 9

Valuing the future in repeated games

Answer 9

If you get punished tomorrow for bad behaviour today and you value the future highly, its in your own self interest to behave today