ECON 101: Chp 14 - oligopoly

Question 1

describe an oligopoly

Answer 1

lies between perfect competition and monopoly

the firms in an oligopoly might product an identical profit and compete only in price or they might produce a differentiated product and compete on price, product quality, and marketing

Question 2

an oligopoly is a market structure in which:

Answer 2

1. natural or legal barriers prevent the entry of new firms
2. a small number of firms compete

Question 3

define a duopoly

Answer 3

an oligopoly market with 2 firms

Question 4

how does a legal oligopoly arise?

Answer 4

arises when a legal barrier to entry protects the small number of firms in a market

Question 5

an oligopoly consists of firms that have a ___ share of the market

Answer 5

large

Question 6

what are 2 characteristics of firms in an oligopoly?

Answer 6

1. interdependent
2. temptation to cooperate to increase their joint econoimc profit

Question 7

describe interdependence in an oligopoly

Answer 7

each firm’s actions influence the profits of all the other firms

Question 8

describe the temptation to cooperate in an oligopoly

Answer 8

when a small number of firms share a market, they can increase their profits by forming a cartel and acting like a monopoly

Question 9

define a cartel

Answer 9

a group of firms acting together to limit output, raise price and increase profit

Question 10

are cartels illegal

Answer 10

yes

Question 11

a market in which the HHI exceeds 2,500 is

Answer 11

an oligopoly

Question 12

define game thoery

Answer 12

a set of tools for studying strategic behaviour

Question 13

what’s strategic behaviour

Answer 13

behaviour that takes into account the expected behaviour of others and the recognition of mutual interdependence

Question 14

define a payoff matrix

Answer 14

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

Question 15

what are the 4 common features of a game

Answer 15

1. rules
2. strategies
3. payoffs
4. outcome

Question 16

what’s the nash equilibirum

Answer 16

player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A

Question 17

how to find the nash equilibrium

Answer 17

compare all the possible outcome associated with each choice and eliminate those that are dominated (not as good as some other choice)

Question 18

what’s the dominant-strategy equilibrium

Answer 18

an equilibrium in which the best strategy of each player is to cheat regardless of the strategy of the other player

Question 19

define a duopoly

Answer 19

an oligopoly with 2 firms

Question 20

define a collusive agreement

Answer 20

an (illegal + secretive) agreement between 2 or more producers to form a cartel to restrict output, raise price, and increase profits

Question 21

what are the 2 strategies firms in cartels use?

Answer 21

1. comply - firm carries out the agreement
2. cheat - firm breaks the arrangement to its own benefit and to the cost of the other firm

Question 22

what are the 4 possible combinations of actions for the firms in cartels?

Answer 22

1. both firms comply
2. both firms cheat
3. firm a complies and firm b cheats
4. firm a cheats and firm b complies

Question 23

how to maximize profit for an oligopoly

Answer 23

(1) firms must agree to restrict output to the rate that makes the industry marginal cost and marginal revenue equal - firms collude to produce the monopoly profit-maximizing output and divide the output equally between themselves - maximum total profit that firm collusion is the economic profit made by a monopoly

(2) one firm cheats on the collusive agreement. industry output is larger than the monopoly output and the industry price is lower than the monopoly price - the total economic profit made by industry is smaller than the monopoly’s economic profit

(3) if both firms cheat the price lowers and output increases (as far as it can without incurring economic loss). each firm makes zero economic profit. (firms makes same output and same price)

Question 24

why do firms have the incentive to cheat?

Answer 24

when price is greater than marginal cost

Question 25

define a cooperative equilibrium

Answer 25

players make and share the monopoly profit is possible

Question 26

what’s the smallest and largest penalty for punishment in a cooperative equilibrium (repeated game)

Answer 26

smallest penalty = “tit for tat strategy”

largest penalty = “trigger strategy”

Question 27

define a tit for tat strategy

Answer 27

strategy where a player cooperates in the current period if the other player in the previous period but cheats in the current period of the other player cheated in the previous period

Question 28

define the trigger strategy

Answer 28

strategy in which a player cooperates if the other player cooperates but plays the Nash equilibrium strategy forever thereafter if the other player cheats

Question 29

in a duopoly which strategy keeps both players cooperating and making monopoly profit?

Answer 29

tit for tat strategy

Question 30

in tit for tat strategy, firms have an incentive to ___ to the monopoly price

Answer 30

stick

Question 31

how can a price war break out?

Answer 31

1. fluctuations in the demand which lead to fluctuations in market price - sometimes when price changes it might seem to one of the firm that the price has fallen bc the other firm has cheated

2.entry of small number of firms in to an industry that had previously been a monopoly

Question 32

define a contestable market

Answer 32

a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants

Question 33

can a sequential contestable market behave as if it were a competitive market

Answer 33

yes even though it can appear to be uncompetitive in the HHI

Question 34

define limit pricing

Answer 34

sets the price at the highest level that inflicts a loss on the entrant - any loss is big enough to deter entry so it is not always necessary to set the price as low as the competitive price

Question 35

what’s a sequential game

Answer 35

if 2 firms play a sequential game - 1 firm makes a decision at the first stage of the game and other makes a decision at the second stage

Question 36

define an anti-combine law - what’s the use?

Answer 36

law that regulates oligopolies and prevents them from becoming monopolies or behaving like monopolies - can work in the social interest to maximize total surplus or in the self-interest of producers to maximize producer surpluses

Question 37

what’s the competition act of 1986

Answer 37

sets our canada’s anti-combine law and establishes a competition bureau and competition tribunal

Question 38

criminal activity is handled by the ____, violations of a non-criminal nature are examined by the _____

Answer 38

courts

competition tribunal