week 9 Flashcards
(23 cards)
What is an oligopoly?
A market structure with many buyers but only a few large sellers who are strategically interdependent.
Why is strategic behavior important in oligopoly?
Because each firm’s decision affects and is affected by rivals’ actions — game theory applies.
What is the Prisoner’s Dilemma in the context of R&D investment?
A situation where both firms would be better off not investing, but fear of being undercut drives them to invest anyway, leading to worse outcomes.
What is a cartel?
A group of firms that collude to restrict output and raise prices, acting like a monopoly.
Why are cartels unstable?
Each member has an incentive to cheat and undercut the price to gain market share.
What strategy can sustain collusion in repeated games?
Tit-for-tat: firms punish cheaters by reverting to competitive pricing in future rounds.
What are two reasons tit-for-tat may fail?
Too many firms or fear of new entrants destabilizes cooperation.
What is entry deterrence?
Strategies by incumbents to discourage potential rivals from entering the market.
Why is commitment important in entry games?
Without credible commitment to fight, incumbents are likely to accommodate, making entry profitable.
What’s the difference between normal and extensive form in game theory?
Normal form shows payoffs; extensive form shows timing and order of moves.
In Cournot competition, what do firms choose?
Output quantities.
What is a reaction function?
A firm’s best output given its rival’s output.
What is the Cournot equilibrium?
The point where both firms’ reaction functions intersect — each firm’s output is optimal given the other’s
How does Cournot output compare to monopoly and perfect competition?
More than monopoly, less than perfect competition.
In Bertrand competition, what do firms choose?
Prices.
What is the Bertrand paradox?
Even with two firms, price competition drives prices down to marginal cost (as in perfect competition).
What conditions break the Bertrand paradox?
Capacity constraints, product differentiation, repeated games.
What is monopolistic competition?
A market with many sellers offering differentiated products and free entry/exit.
What happens in the long run?
Entry drives profits to zero; firms produce where AR = AC (tangency point).
What inefficiencies arise in monopolistic competition?
Price > MC (allocative inefficiency) and output < efficient scale (productive inefficiency).
List five sources of market power.
(1) Exclusive inputs, (2) patents/copyrights, (3) government franchises, (4) economies of scale, (5) network effects.
What distinguishes oligopoly and monopolistic competition from monopoly?
Potential competition and interaction between firms, rather than total market dominance.
