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Flashcards in Week 8 - Oligopoly + business strategy Deck (17)
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1

Define oligopoly

a market structure in which only a few sellers offer similar or identical products

Oligopolists make strategic decisions about price and quantity, taking into account the expected choices of their rivals. (unlike monopolistic competition)

Oligopolists look less at mr = mc

2

what is a duopoly

simplest type of oligopoly, in which market structure is controlled but two members (sellers)

3

The duopolist may agree on a monopoly outcome by:

Collusion is an agreement among firms in a market about
quantities to produce or prices to charge.

–Cartel is a group of firms acting in unison

4

define collusion

an agreement among firms in a market about
quantities to produce or prices to charge.

5

define cartel

group of firms acting in unison

6

draw a graph to reflect cartel behaviour (short term)

:)

7

define nash equilibrium

Economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen

In a Nash equilibrium no player has an incentive to deviate from his or her chosen strategy after considering an opponent's choice.

• Nash equilibrium occurs when no participant/player can improve their gains by altering their strategy if the strategies of other players remains unchanged.

• No‐one has an incentive to break the equilibrium by changing his strategy.

8

Define game theory

The study of how people behave in strategic situations

• Strategic decisions are those in which each person, in deciding what actions to take, must consider how others might respond to that action.

9

Define dominant strategy

A strategy that is best for a player in a game regardless of the game strategies chosen by the other players

10

define and explain the prisoners dilemma

A particular game between two captured prisoners illustrates why cooperation is difficult to maintain even when it is mutually beneficial to both parties

• The prisoners’ dilemma provides insight into the difficulty in maintaining cooperation.
• Often people (of firms) fail to cooperate with one another even when cooperation would make them all better off.

11

group of sellers could form a cartel, what quantity and price would they try to set?

If a group of sellers could form a cartel, they would try to set quantity and price as if they were a monopoly. They would set quantity at the point where the industry marginal revenue equals marginal cost, and set price at the corresponding point on the market demand curve.
So they fix output and price to make a profit

12


Compare the quantity and price of an oligopoly with those of a monopoly.

Firms in an oligopoly produce a quantity of output greater than the level produced by monopoly, resulting in a price less than the monopoly price
(greater competition than a monopoly structure)

13

why do people sometimes cooperate ?

• Firms that care about future profits will cooperate in infinite games rather than cheating in a single game to achieve a one‐time gain.

14

How does the number of firms in an oligopoly affect the outcome in its market?

As the number of sellers in an oligopoly grows larger, an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost, and the quantity produced approaches the socially efficient level.

15

If there was only one supplier of diamonds, what would be the price and quantity

With only one supplier of diamonds, quantity would be set where marginal cost equals marginal revenue. The following table derives marginal revenue:

With marginal cost of $1000 per diamond, or $1 million per thousand diamonds, the monopoly will maximise profits at a price of $7000 and quantity of 6000. Additional production would lead to marginal revenue (0) less than marginal cost.

16

Little Kona is a small coffee company that is considering entering a market dominated by Big Brew. Each company's profit depends on whether Little Kona enters and whether Big Brew sets a high price or a low price.
a) Does either player in this game have a dominant strategy?

A strategy is a specification of an action for a player to choose given each possible situation they could be in. In this game, both Big Brew and Little Kona move simultaneously, so the strategy amounts to simply an action choice.
A player has a dominant strategy if they would be better off choosing that strategy than choosing any other strategy, regardless of the choice(s) of the other player(s). For example, in the Prisoner's Dilemma, each player has a dominant strategy to confess.
In this game, Little Kona's possible actions (and thus strategies) are to Enter or Don't Enter. If Little Kona enters, then Little Kona earns $2 million or loses $1 million, as Big Brew sets a High or Low price; if Little Kona does not enter, then Little Kona earns $0 or $0 as Big Brew sets a High or Low price -- that is, if Big Brew sets a High Price, Little Kona earns more by Enter, but if Big Bew sets a Low Price, then Little Kona earns more by Don't enter. Therefore, Little Kona does not have a dominant strategy.
We apply the same analysis for Big Brew. If Big Brew sets a High Price, it earns $2 million or $7 million as Little Kona Enters or Doesn't Enter; if Big Brew sets a Low Price, it earns $1 million or $2 million as Little Kona Enters or Doesn't Enter. That is, Big Brew earns more by playing High Price than by playing Low Price, regardless of Little Kona's choice -- $3 million > $1 million, and $7 million > $2 million. Therefore, Big Brew has a dominant strategy to play High Price.

17

Does your answer to part a) help you figure out what the other player should do? What is the Nash equilibrium? Is there only one

Since Big Brew has a dominant strategy, Big Brew plays this. Although Little Kona does not have a dominant strategy, Little Kona anticipates that Big Brew will play its dominant strategy and set a High Price. Then, Little Kona concludes that it will either earn $2 million by Enter or $0 by Don't Enter, and so it plays Enter.

This means that Little Kona's strategy Enter is a best response to Big Brew's strategy to set High Price; and since High Price is a dominant strategy, it is a best response to Little Kona's strategy. Therefore, this is a Nash equilibrium -- each player's strategy is a best response to the other player's strategy.

Note that there are no other Nash equilibria.