10.2 Oligopoly

Applying the prisoner's dilemma to a duopoly, can the two firms trust each other?

No, the threat of betrayal and earning less profit discourages firms from trusting one another. No, firms are self-interested. The firm knows it can earn greater profits if it betrays the other firm(s) in the market than it would earn if it were betrayed by the other firms.

In a cartel, if oligopolists always match price cuts by other firms in the cartel, but do not match price increases, which of the following is not a possible outcome?

One firm in the cartel could lower its prices to attract customers from all of the other firms and then be the dominant firm.

What is a prisoner's dilemma?

a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. It applies well to oligopoly

When firms informally act together to reduce output and keep prices high, they are engaging in _____________.

collusion

What is the kinked demand curve?

competing oligopoly firms commit to match price cuts, but not price increases

Given the payoff matrix (shown below) for a duopoly consisting of Firm A and Firm B in which each firm is considering an expanded advertising campaign, which firm has a dominant strategy?

A dominant strategy is a strategy an individual (or firm) will pursue regardless of the other individual's (or firm's) decision. In this example, both Firm A and Firm B will benefit from expanded advertising because both are better off by expanding advertising regardless of what the other decides to do.

Game theory is defined as:

Game theory is defined as a branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs based on what decisions the other players make.

Which of the following are barriers to entry that contribute to the emergence of an oligopoly market?

high start-up costs patents to a few companies for products in the same market Barriers to entry lead to oligopolies. High start-up costs deter firms from entering the market, creating an oligopoly market for the firms in the market. Government patents can also create a situation where the market only has a few competitors.