Chapter 26 Definitions Flashcards
Oligopoly (25 cards)
oligopoly
market structure in which there are very few sellers. Each seller knows what the other sellers will react to its changes in prices, quantities, and qualitites
Strategic dependence
Situation in which one firm’s actions with respect to price, quality, advertising, and related changes may be strategically countered by the reactions of one or more other firms in the industry. Such dependence can exist only when there is a small number of major firms in an industry
Vertical Merger
The joining of a firm with another to which it sells an output or from which it buys an input
Horizontal Merger
The joining of firms that are producing or selling a similar product
Concentration ratio
The percentage of all sales contributed by the leading four or leading eight firms in an industry; sometimes called the industry concentration ratio
Herfindahl Index
The sum of the squared percentage sales shares of all firms in an industry
Reaction function
The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry
Game theory
Way of describing the various possible outcomes in any situation involving two ore more interacting individuals when those individuals are aware of the interactive nature of their situation and plan accordingly. The plans made by these individuals are called game strategies
Cooperative game
Gam in which the players explicitly cooperate to make themselves jointly better off. As applied to firms, it involves companies colluding in order to make higher than perfectly competitive rates of return
Noncooperative Game
Game in which the players neither negotiation nor cooperate in any way As applied to firms in an industry this is the common situation in which there are relatively few firms and each has some ability to change price
Zero-sum game
A game in which any gains within the group are offset by equal losses by the end of the game
Negative-sum Game
A gam in which players lose as a group during the process of the game
Positive sum game
a game in which players as a group are better off at the end of the game
Strategy
Any rule that is used to make a choice such as “always pick heads”
Dominant strategies
Strategies that always yield the highest benefit. Regardless of what other players do, a dominant strategy will yield the most benefit for the player using it
Prisoner’s dilemma
A famous strategic game in which two prisoners have a choice between confessing and not confessing to a crime. If neither confesses, they serve a minimum sentence. If both confess, they serve a longer sentence. If one confesses and the other doesn’t, the one who confesses goes free. The dominant strategy is to always confess
Payoff matrix
Matrix of outcomes, or consequences of the strategies available to the players in a game
Opportunistic behavior
Actions that focus solely on short-run gains because long-run benefits of cooperation are perceived to be smaller
Tit-for-tat strategic behavior
IN game theory, cooperation that continues as long as the other players continue to cooperate
Cartel
An association of producers in an industry that agree to set common prices and output quotas to prevent competition
Network effect
Situation in which a consumer’s willingness to purchase a good or service is influenced by how many others also buy or have bought that item
Positive market feedback
A tendency for a good or service to come into favor with additional consumers because other consumers have chosen to buy the item
Negative market feedback
A tendency for a good or service to fall out of favor with more consumers because other consumers have stopped purchasing the item
Two-sided market
A market in which an intermediary firm provides services that link groups of producers and consumers
