Chapter 10 & 13 Flashcards
(44 cards)
When does an oligopoly exist?
When a small number of firms sell a differentiated product in a market with high barriers of entry
What is a concentration ratio? What does it not account for?
A measure of the oligopoly power present in an industry
- Global competition
What is the four-firm concentration ratio?
Expresses the sale of the four largest firms in an industry as a percentage of that industry’s total sales
What is collusion?
Collusion is an agreement among rival firms that specifies the price each firm charges and the quantity it produces.
What is a cartel?
A cartel is a group of two or more firms that act in unison
What attempts to prevent oligopolies from behaving like monopolies?
Anti-trust laws
What is a firm’s market share determined by?
- The product it offers
- The price it charges
- The actions of its rivals
What is mutual interdependence?
A market situation where the actions of one firm have an impact on the price and output of its competitors.
What happens to the output and price in an oligopoly (in relation to other market structures)?
- Higher output (compared to monopoly), lower output (compared to competitive market)
- Lower price (compared to monopoly), higher price (compared to competitive market)
When does a Nash Equilibrium occur?
The point of output both firms reach where neither has an incentive to change its short-term profit-maximising strategy.
- When both firms use the dominant strategy
What effect does adding more firms have in an oligopoly?
Increases the possibility of a more competitive result
What is the price effect?
How a change in price affects the firm’s revenue
What is the output effect?
How a change in price affects the number of customers in a market
When does predatory pricing occur?
- When firms deliberately set their price below average variable costs with the intent of driving rivals out of the market
- Firm suffers a short-run loss
- Once rivals are gone, firm increases price (acts like a monopoly)
What are network externalities?
When the number of customers who purchase or use a good influences the quantity demanded
- Oligopolies leverage the number of customers in their network and try make switching more difficult
What are switching costs?
The costs incurred when a consumer changes from one supplier to another
What is game theory?
A branch of mathematics that economists use to analyse the strategic behaviour of decision-makers
What is the ‘game’ usually represented by? What does it show?
A pay off matrix which shows the players, strategies and pay-offs
What is a dominant strategy?
When a player will always prefers one strategy, regardless of what his opponent chooses. (i.e strategy which yields most revenue/profit for each firm)
Describe the pay-off matrix for the prisoner’s dilemma
When decision makers face incentives that make it difficult to achieve mutually beneficial outcomes
What is tit-fot-tat?
A long-run strategy that promotes cooperation among participants by mimicking the opponent’s most recent decision with repayment in kind
What is a sequential game?
One player moves first, the other player responds to the first move
What is backward induction?
The process of deducing backward from the end of a scenario to infer a sequence of optimal actions
- Iggy goes with highest value possible
What are the limitations of game theory?
Some games do not have a dominant strategy (eg. tennis)
