Chapter 49

Question 1

What is a cartel?

Answer 1

This is a formal agreement between firms to limit competition in the market, e.g. by limiting output in order to rise prices.

Question 2

What is collusion?

Answer 2

Collective agreements, either formal or tacit, between firms that restrict competition.

Question 3

What is collusive oligopoly?

Answer 3

This is a market with a high concentration ratio where a few firms cooperate, either formally or tacitly to limit competition.

Question 4

What is a concentrated market?

Answer 4

This is a market where most of the output is produced by a few firms and where therefore the concentration ratio is high.

Question 5

What is a duopoly?

Answer 5

This is an industry where there are only two firms.

Question 6

What is game theory?

Answer 6

Game theory is the analysis of situations in which players are interdependent.

Question 7

What is market conduct?

Answer 7

Market conduct is the behaviour of firms such as pricing policies, promotion of products, branding and collusion with other firms.

Question 8

What is marketing mix?

Answer 8

Different elements within a strategy designed to create demand for a product and profits for a firm.

Question 9

What is non-collusive or competitive oligopoly?

Answer 9

When firms in an oligopolistic market compete amongst themselves and there is no collusion.

Question 10

Define oligopoly.

Answer 10

This is a market structure where there is a small number of firms in the industry and where each firm is interdependent with one another creating uncertainty. Barriers to entry are likely to exist.

Question 11

Define overt or formal collusion.

Answer 11

Overt or formal collusion is when firms make agreements among themselves to restrict competition, typically by reducing output, raising prices and keeping potential competitors out of the market. Cartels are on example of formal collusion.

Question 12

What is a payoff matrix?

Answer 12

In game theory, a payoff matrix shows the outcomes of a game for the players given different possible strategies.

Question 13

Define predatory pricing.

Answer 13

Predatory pricing is a pricing strategy where a firm lowers its prices when a new entrant comes into the market, in order to force them out of the market, and then putting prices back up again, once this has been achieved.

Question 14

What is a price agreement?

Answer 14

This is a type of formal collusion where two or more firms arrange to fix the prices of their products.

Question 15

What is a price follower?

Answer 15

A price follower is a firm which sets its price by reference to the prices set by the price leader in a market.

Question 16

What is price leadership?

Answer 16

This is when one firm, the price leader, sets its own prices and other firms in the market set their prices in relationship to the price leader.

Question 17

What is a price war?

Answer 17

This is a situation where several firms in a market repeatedly lower their prices to outcompete other firms; the objective may be to gain or defend market share.

Question 18

Explain the prisoners’ dilemma.

Answer 18

This is a game where, given that neither player knows the strategy of the other player, the optimum strategy for each player leads to a worse situation than if they had known the strategy of the other player and been able to co-operate and co-ordinate their strategies.

Question 19

Define tacit or informal collusion.

Answer 19

This is when firms collude without any formal agreement having been reached and where there is no explicit communication between firms and strategies; an example is price leadership.