Price and Output Determination Under Oligopoly Flashcards
What is a Concentration Ratio?
gives the share of the total industry sales accounted for by the four largest firms in a particular industry.
What is the Herfindahl-Hirschman Index (HHI)?
The HHI is calculated by summing the squares of the market share of each firm in an industry.
HHI Rises with fewer firms as industry becomes more concentrated.
Horizontal Merger:
Integration of firms selling a similar product.
Conglomerate Merger:
Merger between firms in unrelated markets
Vertical Merger:
Merger between firm and its suppliers
Goal of a Cartel?
To act as a monopoly would.
Price Leadership:
one firm raises its price in the expectation that other firms in the industry will follow its lead is an example of price leadership. Under price leadership, one firm in the industry makes pricing decisions and other firms follow the lead without any overt communication between firms.
The kinked demand curve model is particularly useful in explaining:
Rigid prices in oligopolistic markets.
According to the kinked demand curve model, firms are reluctant to raise prices, because of the belief that the firm will lose customers to competing firms who do not raise prices. Firms are similarly reluctant to lower prices because of the expectation that rival firms will match any price reduction and, therefore, prevent the firm from increasing its share of the market.
Which firm faces the most elastic demand curve?
Perfectly competitive firm.
Which types of markets can firms earn economic profits in the long run?
Monopoly and Oligopoly
In an unbalanced oligopoly, market power is
distributed unevenly among firms in the industry
In which market structure does the profit maximization rule, MR = MC, apply
All of them!
Game Theory
prices are subject to fits of change as firms test each other’s responses.
In game theory, firms will consider what their competitors will do and then act accordingly. Firms test each other’s responses and attempt to avoid the worst outcome but may achieve a less than optimal outcome.
Brand multiplication in oligopoly occurs due to the desire of firms to
increase market share without lowering prices
In game theory, do firms achieve the optimal outcome?
No, firms may attempt to avoid the worst outcome but they achieve a less than optimal outcome.
