Topic 10

Question 1

what are the 3 characteristics of an oligopoly and what are 3 examples of oli markets

Answer 1

1. a few large sellers and lots of smaller fringe firms
2. homogenous OR differentiated goods with MANY substitutes
3. Barriers to entry

domestic airlines, car manufacturing, unis and super markets

Question 2

wht are economies of scale and how does this act as a barrier

Answer 2

if existing firms are producing output level that is minimum efficient scale it is difficult for potential firms to enter as they would have to sell at high output level to be competitive

Question 3

define game theory

Answer 3

framework for understanding the behaviour of interdependent agents and use of strategy in interdependent games (these behaviours determine demand curve)

Question 4

in terms of price, evaluate the efficiency and welfare of an oligopoly in comparison to perfect competition

Answer 4

if firms in oli market engage in implicit/explicit collusion: OUTPUT is lower and PRICE is higher so Consumer Surplus falls.

Question 5

in terms of profit, evaluate the efficiency and welfare of an oligopoly in comparison to perfect competition

Answer 5

firms can make LR profits because there are barriers to entry so they can retain profit

Question 6

in terms of efficiency, evaluate the efficiency and welfare of an oligopoly in comparison to perfect competition

Answer 6

Allocative: collusion means price and DWL is higher, price war means price and DWL is lower. Allocative efficiency not solely dependent on number of firms.
Productive: no assumption firms will operate close to minimum efficient scale
Dynamic: oli firms motivated to R+D to stay ahead of comp

Question 7

define RULES, STRATEGIES and PAY OFFS for game theory

Answer 7

1. rules: initial condition gvoernning conduct of players
2. strategies: decisions which player had
3. Pay Offs: what each player stands to lose/gain when certain strategies are followed (usually profit/utility)

Question 8

define the equilibrium, dominant strategy, outcome of the PRISONERS DILEMMA

Answer 8

eql: when both players confess (occurs when both players pursue dominant strat)
dom strat: confess (better option despite the other players decision)
outcome: confess, confess

Question 9

what is nash equilibrium

Answer 9

each player strategy is their best choice given the other players strategy, neither can increase profit from changing strat once each strategy is revealed.

Question 10

what is the PLAY for burn the boats

Answer 10

a player eliminates strategy that the other player believes will be made

Question 11

what are the 2 potenial strategies for the prisoners dilemma in terms of firms pricing point

Answer 11

1. signalling: each advertise they will match lowest price offered
2. tit for tat: responds in one period with same action that the rival firm used in last period (cooperation invites cooperative response, noncooperation invites a non cooperative responds

Question 12

do oli firms cooperate

Answer 12

keep cooperative game strat on cirtical factors like price which are visible and non cooperative strat for factors like avertising budgets (opaque)