Topic 15- Oligopoly

Question 1

Key features of Oligopoly

Answer 1

• natural or legal barriers prevent the entry of new firms
• a small number of firms compete

Question 2

who is the suppliers in oligopoly

Answer 2

-few sellers offer similar or identical products

Question 3

How do you know if it is a monopoly or oligopoly?

Answer 3

Look at demand curve

For perfectly competitive markets= demand is marginal revenue curve it is perfectly straight!!!!!! because in a perfectly competitive market people will buy only at the market price

However if the demand curve is going down it indicates that the price can be manipulated and people will still buy- this only happens if there are limtiied suppliers AKA A MONOPOLY BIATCH

Question 4

What are the barriers to entry

Answer 4

-Economies of scale
-ownership of a key input
-Govt imposed barriers

Question 5

Barriers to entry: economies of scale

Answer 5

The lrac curve is still decreases as the firm increases output, IT IS CHEAPER FOR TWO-THREE FIRMS to cover entire market demand

Question 6

Natural duopoly

Answer 6

A market with two firms, where together both can cover the market demand!!

The ATC of one firm is half the quantity demanded, so you need one more firm to cover the other half

Question 7

A natural oligpoly

Answer 7

A market with three firms

The ATC of one firm ia 1/3 the quantity demanded, so you need 3 firms to cover the total quantity demadned

Question 8

When may a legal oligpoly arise

Answer 8

even where the demand and costs leave room for a large number of firms- if the govt gives irghts to these three then these three are the only ones!

Question 9

What happens when there are only a small number of firms

Answer 9

1. Interdependance (each individual firms profit depends on every firms actions)
2. temptation to co-operate (firms in oligioply feel tempted to co-operate and form a cartel!! jacking the price up significant, decreasing outputs,increasing profits)

Question 10

Game Theory

Answer 10

Studies the strategic behaviour and decision making- mutual recognition of interdependance

Question 11

Rules of all games

Answer 11

1. rules
2. strategies all athe possible actions of every player
3. payoffs are the results of the interactions amoing the players stragtgises
4. outcomes

Question 12

The Prisoners’ Dillema

Answer 12

two parties, separated and unable to communicate, must each choose between cooperating with the other or not. The highest reward for each party occurs when both parties choose to co-operate.
BUTTTT because rational thinkers, they choose to not co-operate and both suffer

Question 13

strategies
outcomes
payoffs
ALL OF THE PRISONERS’ DILEMMA

Answer 13

1. confess/deny
2. both confess, both deny, A confess B deny, A deny Bconfess
3. each prisoner can work out what happens to him and the other!

Question 14

Payoff matrix

Answer 14

Shows the 4 possible outcomes

Question 15

How to think about the player matrix

Answer 15

Think of it in rows and columns, A’s actions are the twon columns beneath, and B’s actions are the two rows beside

Question 16

Dominant strategy

Answer 16

the strategy that is best for a player in a game regardless of the strategies chosen by other players

Question 17

What action will any game player do?

Answer 17

the rational on ethat is in self-interest, that will make the player better off

Question 18

Nash equilibrium

Answer 18

When both players are rational they will choose their actions in their own self interest, THIS IS THE POSITION WHERE EAHCH PLAYER IS LOOKING OUT FOR THEM SELF

Question 19

Nash equilibrium for prisoners dilemma

Answer 19

both confess!!

Question 20

Is there a better outcome then the nash equilibrium

Answer 20

YES! but cant be achieved, because each player figrures out there is a better strategy (The dominant strategy to be achieved)

Question 21

Collusive agreement
-strategies
-outcomes

Answer 21

when two firms agree to form a cartel, raise the price of good, decrease output, increase proft

STRATEGIES: Comply or Cheat
Outcomes: Both compy, both cheat, a complies b cheats, b complies a cheats

Question 22

How do firms in oligopoly maximize economic profit?

Answer 22

set the cartel’s marginal cost=marginal revenue!! REMEMBER THE MARGINAL REVENUE CURVE OF OLIGOPOLY is the same as that of a monopoly (diagonal below price at every point)

Question 23

What is the marginal cost curve of the industry of oligopolys

Answer 23

The horizontal sum of the MC curves fo the two firms

Question 24

If one firms in oligopoly increases output?

Answer 24

the profit for that firm would increase, the other firm would take an economic loss!!!!!!!1 the price would lower and the complying firm would be hurt :(

Question 25

If both firms in oligopoly increases output (both cheat)

Answer 25

Market equilbrium is reached!! both firms make zero profit in the long run of this perfectly competitive market

Question 26

If neither cheat

Answer 26

Then both firms profit greatly! but not as great as they would with cheating :)

Question 27

What strategy will the firms choose

Answer 27

BOTH WILL CHEAT! this is the nash equilbrium

the quantity and price achieved in this outcome will be that of a competitive market, both firms will make zero eocnomic profit

Question 28

public policy to oligopolies

Answer 28

1. policymakerrs try to induce firms in oligopoly to compete rather than co-operate
2. competition adn anti-trust laws!!!
3. The application of these laws can be controversial because some
   behaviour that may seem to reduce competition may in fact have
   legitimate business purposes.

Question 29

oligopoly vs monopoly

Answer 29

Oligopolistic firms are interdependent in a way that competitive firms are not. Our goal in this chapter is to see how this interdependence shapes the firms’ behaviour and what problems it raises for public policy.