Chapter 26 Key Concepts

Question 1

Oligopoly characteristics

Answer 1

Small number of firms, pricing jointly, barriers to entry, product may be differentiated or standardized

Question 2

Examples of Oligopoly

Answer 2

Phones, phone service, cola, cars

Question 3

Causes of Oligopoly

Answer 3

Economies of scale, barriers to entry, mergers

Question 4

Concentration Ratio

Answer 4

Percentage of sales by the top four largest firms in an industry

Question 5

Herfendel index

Answer 5

Alternative measure of concentration, summation of percentage of sales squared of all firms

Question 6

Prisoner’s dilemma

Answer 6

Situation where players need to make a choice not knowing what other players will choose

Question 7

Dominant strategies

Answer 7

A strategy where a participant will make the same choice regardless of what the other player will choose

Question 8

Nash outcome

Answer 8

An outcome where both players are following their dominant strategies

Question 9

Cartels

Answer 9

An agreement between firms not to compete with each other on price

Question 10

Conditions on making cartels more stable

Answer 10

Small number of firms, homogeneous product, easily observable prices, little variation in price