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Question 1

what are the defining characteristics of an oligopoly

Answer 1

• small number of large firms
• control over price but interdependence (my actions affect my competitors and their actions affect me)
• natural or legal barriers prevent the entry of new firms
• there will be a temptation to cooperate / collude

Question 2

since there is an interdependence what do firms need to utilize

Answer 2

strategy

Question 3

what is the name for oligopolistic firms that collude and why would they want to collude

Answer 3

cartel.

you want to collude because will collusion you can increase profits, your goal is to act like a monopoly b/c with a monopoly like structure you maximize profit

Question 4

what is game theory

Answer 4

a tool for studying strategic behavior. it considers the expected behavior of others and recognition of interdependence

Question 5

what is a payoff matrix

Answer 5

a table that shows the payoffs for every possible action by each player for every possible action of the other player

Question 6

what is the NASH equilibrium

Answer 6

if we assume both players are rational, the NASH equilibrium is the point where you do the best you can given what the opponent is doing & vice versa.

Question 7

what is a dominant strategy

Answer 7

is is where regardless of what the other player does you will always choose the same strategy

Question 8

in a one shot game, why is it that both players don’t choose the optimal choice that benefits the both of them

Answer 8

because there is no collusion parties are worse off, if we allowed repeated interaction

Question 9

what happens to the market if there is a collusive agreement

Answer 9

there will be
- restriction of output
- prices will rise
- profits increase

Question 10

where is maximum profit in an oligopoly

Answer 10

MC = MR (also the monopoly equalibrium)

Question 11

if one firm maintains their collusion deal and the other cheats what happens to their profits

Answer 11

the cheater increases their economic profit P > ATC

complier incurs an economic loss
ATC > P

Question 12

what happens to profit if both firms cheat

Answer 12

if both cheat, the quantity and price is back at a competitive level and they make zero economic profit

Question 13

what is the game of chicken

Answer 13

its the first person to cave in will be the chicken, like the elementary version of chicken

Question 14

describe the game of chicken in terms of economics

Answer 14

a firm will need to R&D to make more profit, but the technology developed cannot be patented. so the firm that spends money R&D will make less money than the firm that just used the technology after it’s been developed

Question 15

how do you determine what the outcome will be if there are two equalibriums

Answer 15

you cannot, might as well flip a coin

Question 16

what if we had a repeated duopoly game, how can you expect the game to change

Answer 16

in a repeated game, firms have the option to collude and make monopoly profit.

repeated actions also allows for punishment strategies to be introduced, which encourages firms to comply and achieve a cooperative equilibrium

Question 17

what is the cooperative equilibrium

Answer 17

the equilibrium where colluding firms can make a monopoly profit

Question 18

explain the tit-for-tat punishment strategy

Answer 18

one player will cooperate if the other player cooperated last period. if they cheated last period i will cheat this period.

Question 19

explain the trigger punishment strategy

Answer 19

if you cooperate, ill cooperate. if you cheat i will play the nash equilibrium forever

Question 20

why does the tit-for-tat punishment work

Answer 20

if you cheat last term, i will cheat next term. and you will be worse off since i cheated. if you cheat again I will also cheat again. You will comply the next periods because you know it is always better to collude. You will end up doing worse if you cheat

Question 21

what is price wars

Answer 21

when firms continuously lower their prices to undercut each other. it can result from a tit-for-tat strategy

Question 22

what is the difference between prisoners/chicken and a sequential game

Answer 22

in a sequential timing matters, so the results are reflected in a tree not a matrix

Question 23

what is a contestable market

Answer 23

a market where firms can enter and leave easily so firms currently in the market face competition from the possibilities of new entrants. the firms in the market will need to decide on a price competitive enough to deter entry but enough to still make positive profit

Question 24

what is limit price

Answer 24

when firms in the market sets the price at the highest level that still deters potential entrants out

Question 25

who moves first in a sequential game

Answer 25

the largest firm, we move in size order