Week 8 - Oligopoly + business strategy Flashcards
Define oligopoly
a market structure in which only a few sellers offer similar or identical products
Oligopolists make strategic decisions about price and quantity, taking into account the expected choices of their rivals. (unlike monopolistic competition)
Oligopolists look less at mr = mc
what is a duopoly
simplest type of oligopoly, in which market structure is controlled but two members (sellers)
The duopolist may agree on a monopoly outcome by:
Collusion is an agreement among firms in a market about
quantities to produce or prices to charge.
–Cartel is a group of firms acting in unison
define collusion
an agreement among firms in a market about
quantities to produce or prices to charge.
define cartel
group of firms acting in unison
draw a graph to reflect cartel behaviour (short term)
:)
define nash equilibrium
Economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen
In a Nash equilibrium no player has an incentive to deviate from his or her chosen strategy after considering an opponent’s choice.
- Nash equilibrium occurs when no participant/player can improve their gains by altering their strategy if the strategies of other players remains unchanged.
- No‐one has an incentive to break the equilibrium by changing his strategy.
Define game theory
The study of how people behave in strategic situations
• Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.
Define dominant strategy
A strategy that is best for a player in a game regardless of the game strategies chosen by the other players
define and explain the prisoners dilemma
A particular game between two captured prisoners illustrates why cooperation is difficult to maintain even when it is mutually beneficial to both parties
- The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation.
- Often people (of firms) fail to cooperate with one another even when cooperation would make them all better off.
group of sellers could form a cartel, what quantity and price would they try to set?
If a group of sellers could form a cartel, they would try to set quantity and price as if they were a monopoly. They would set quantity at the point where the industry marginal revenue equals marginal cost, and set price at the corresponding point on the market demand curve.
So they fix output and price to make a profit
Compare the quantity and price of an oligopoly with those of a monopoly.
Firms in an oligopoly produce a quantity of output greater than the level produced by monopoly, resulting in a price less than the monopoly price
(greater competition than a monopoly structure)
why do people sometimes cooperate ?
• Firms that care about future profits will cooperate in infinite games rather than cheating in a single game to achieve a one‐time gain.
How does the number of firms in an oligopoly affect the outcome in its market?
As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level.
If there was only one supplier of diamonds, what would be the price and quantity
With only one supplier of diamonds, quantity would be set where marginal cost equals marginal revenue. The following table derives marginal revenue:
With marginal cost of $1000 per diamond, or $1 million per thousand diamonds, the monopoly will maximise profits at a price of $7000 and quantity of 6000. Additional production would lead to marginal revenue (0) less than marginal cost.
