Oligopoly good questions
If firms in oligopoly look only at their own self-interest in deciding the output they should produce, the total market output will exceed that of a monopoly.
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What are the characteristics of an oligopoly?
-A few large producers -Homogeneous or differentiated products -Control over price but mutual interdependence -Barriers to entry
What are the barriers to entry for an oligopolistic market?
-Economies of scale -Large expenditures for capital -Ownership and control of raw materials -Patents -Preemptive and retaliatory pricing and advertising strategies
What is the Herfindahl Index?
-It is the sum of the squared percentage market shares (percentage of total sales) of all firms in the industry. -It gives much greater weight to larger firms than to smaller firms. -add up % and square it
What are examples of a differentiated oligopoly?
-Many consumer goods -Automobiles -Tires -Household appliances -Electronics equipment -Breakfast cereals -Cigarettes -Many sporting goods
Suppose the Herfindahl Indexes for industries A, B and C are 1,200, 5,000, and 7,500 respectively. The data implies what about industry A? What about industry C?
-Market power is least in industry A. -Market power is greatest in industry C.
Why is it difficult to analyze an oligopoly?
-Mutual interdependence -Outcomes are less certain than other markets
What are the elements to a game theory game?
-The players -The strategies available to each player -The payoffs each player receives
Firm market Share percent A 30 B 30 C 20 D 10 E 5 F 5 is this an oligopoly? How can you tell
-Yes -The four largest firms have a market share greater than 40%.
how do duopolies increase their profits
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how do oligopolies increase their profits
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What is the amount for an oligopoly to exist for a four-firm sales concentration ratio?
40% or more
What is the four-firm concentration ratio?
90%
What is a duopoly?
An oligopoly consisting of two firms.
Differentiated Oligopoly
An oligopoly in which the firms produce a differentiated product.
Homogeneous Oligopoly
An oligopoly in which the firms produce a standardized product.
Boeing and Airbus have entered into a cartel agreement that will enable them to boost their profits. What occurs if Boeing decides to cheat on the agreement?
Boeing will lower the prices of their planes, the industry output will increase, and the total profits in the airplane industry will decrease
What is interindustry competition?
Competition between two products associated with different industries.
What is mutual interdependence?
Firm must consider the reactions of its rivals when it determines its price policy.
What is the Nash Equilibrium?
In game theory, the equilibrium that results when all players choose their optimal action given the actions of other players, ignoring the effect of that action on the payoffs of other players. Non-cooperative equilibrium
Why are cartels difficult to maintain in the long run?
Individual members may find it profitable to cheat on agreements.
What is a dominant strategy?
It is the best strategy for one player regardless of the strategy the other player follows.
What do concentration ratios measure?
Percentage of total sales accounted for by the four largest firms in the industry.
Interindustry Competition
The competition for sales between the products of one industry and thee products of another industry.
Concentration Ratio
The percentage of the total sales of an industry made by the four (or some other number) largest sellers in the industry.
What does Game Theory analyze?
The pricing behavior of oligopolists
What is a dominated strategy?
The strategy that yields a lower payoff than at least one other strategy.
What is the conclusion in the prisoners' dilemma?
Two prisoners acting in their own best interest harm their joint interest
What makes it more likely a cartel will be successful?
When you have cost and demand curves of various participants are very similar.
The prisoners' dilemma is
a cartel
A Nash equilibrium occurs when each player in a game takes the _____ given the action of the other player.
best possible action for himself or herself
In a prisoners' dilemma game, with the Nash equilibrium
both players get their best outcome
firms in an oligopoly
can each influence the market price
What are the three major means of collusion by oligopolists?
cartels, tacit understandings, and price leadership
Game theory is the tool that economists use to analyze strategic behavior, which is behavior that takes into account the ______ behavior of others and the mutual recognition of ________.
expected, interdependence
The major dilemma facing Boeing and Airbus is the
fact that if each firm separately tries to maximize its profit, it might wind up with less profit that otherwise.
A Nash equilibrium
i. is named after the Nobel prize winning economist, John Nash. ii. occurs when each player chooses the best strategy given the strategy of the other player. iii. must give the best possible outcome for each player.
a market with two firms competing
is a duopoloy
If firms establish an effective cartel, the resulting output and price will approximate those of what kind of market structure?
monopoly
when firms in an oligopoly collude and do not cheat on a cartel agreement, they achieve long-run economic profit similar to
monopoly
Long-run economic profits are most likely to be earned in
monopoly and oligopoly.
The prisoners' dilemma is similar to the problem faced by firms in an oligopoly in the United States because
mutual interdependence exists, and collusion is illegal in the United States, so the firms cannot legally communicate
What is the benefit of collusion?
oligopolists can increase their profits
8. Game theory is used to analyze the interactions among firms in _______
oligopoly
What is a differentiated oligopoly?
products are similar but have differences
What is a homogeneous oligopoly?
products are very similar, standardized
What are examples of a homogeneous oligopoly
steel, zinc, copper, aluminum, lead, cement, industrial alcohol
Economists use game theory to analyze strategic behavior, which takes into account
the expected behavior of others and the recognition of mutual interdependence.
dominant strategy
the strategy earns a player a larger payoff than any other. This one's the best one for you, despite others!
dominated strategy
the strategy earns a player a smaller payoff than some other strategy
