ECON: Oligopoly/Game theory Terms

Characteristics of Monopolistic Comp.

-Large # of sellers -Differentiated products(fried vs. chicken sandwich) -Some control over price -Easy entry/exit (low barriers) -Can charge highest amount -Lots of non price competition short run: econ loss/profit long run: new firms enter so DEMAND decrease for current firms, leading to NO PROFIT since price makers, in graph, MR under Demand line LONG RUN EQUILIBRIUM:Quantity where MR=MC, go up to price line, = ATC

Tacit collusion

-unspoken(unformal) agreement: limit production/raise prices to benefit both profits

3 types of Oligopolies

1. Price Leadership -dominant firm initiates price first -other firms follow leader -occurs without outright collision 2.Colluding Oligopoly -cartels -act as monopoly together -punish if someone cheats -require idential costs/prices -set price/output on agreed level 3.Non Colluding Oligopoly if not colluding, either... 1)Match price:one cut price, other follow, causes inelastic demand(flat slope) 2)Ignore change: one firm raise, other maintain, causes elastic demand(large slope)

MPC VS. OLIGOPOLIES

MPC: differentiated/identical products, low barriers to entry, easy exit and entry, large # of firms, use non price competition, experience excess capacity(inefficiency), produce at highest price point, zero econ profit in long run graphs: excess capacity, zero profit in long run, Oligopolies -game theory, interdependence, small number of firms, price makers, inefficient, collude, high barriers to entry graphs: shifts of demand, colluding graph=inelastic(act as a monopoly and share profit), noncolluding graph=elastic

Characteristics of Oligopolies

Oligopolies are formed when a small # of large firms try to control an industry . -Small # of sellers large producers(nike,adidas, new balance) -Identical/differentiated products -High barriers to entry:economies of scale, high start up costs, -Control over price(price maker) -Mutual interdependence ex. OPEC,cereal companies, etc.

Cartel

a group of producers that agree to restrict output in order to increase prices and joint profits -group version of collusion

Dominant strategy

a player's best action regardless of other player's action

Interdependent

a relationship where the outcome(profit) of each firm depends on the actions of other firms in the market

Product differentiation

an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry

Duopoly

an oligopoly only consisting of two firms -duopolist

Strategic Behavior

attempts to influence the future behavior of other firms

Noncooperative behavior

each firm acting in their own self interest, ignoring the effects of their actions on each other's profits

Zero profit equilibrium

each firm makes zero profit at its profit max quantity -in the long run, a monopollistically competitive industry ends ip in ZPE -just manage to cover costs

Antitrust Policy

efforts by gov. to prevent oligopolies from becoming monopolies

Entry and exit shift on MPC

entry: demand curve and MR curve left(decrease) exit: demand curve and MR curve right(increase) -entry occurs in long run when existing firms are profitable(firms see profit, want to join) -entry causes decrease because existing firms' customers go to new lace, causes zero frofit in long run -exit occurs in long run when existing firms are unprofitable -firm receives higher price for each unit selling, profit increase -will stop when remaining firms make zero profit

Non-price competition

firms that have a tacit understanding not to competein price often engage in intense nonprice competition: using free services(advertising, free food with purchase, free cleaning, etc) to try to increase sales

Prisoners dilemma

game in which 1) each player has an incentive to cheat(take an action that benefits themself at the other person's expense) 2)when both cheat, both are worse off than if neither cheated -cannot discuss with each other, must assume

Brand names

name owned by a particular firm that distinguishes its products from those of other firms sweetgreen salad vs. other salads

Excess capacity

occurs when MPC fail to produce enough to minimize ATC -produce less output than should on graph: gap between ATC(MC and ATC intersection) output and Profit max output (MC and MR intersection up price line)

Price war

occurs when tacit collusion breaks down and aggressive price competition causes prices to collapse

Price leadership

one firm sets the price first, and other firms follow

Payoff matrix

payoff to each player depends on the actions of both. - helps us analyze situations of interdependence

Nash Equilibrium(Noncooperative equilibrium)

result when each player in a game chooses the action that maximizes his/her payoff, given the actions of other players, -cannot discuss with other players -box where both have dominant strategies -find where one has dominant strategy, highest number of that strategy for other firm -if no DS, choose highest number for both DIFFERENT THAN COLLUSION

Tit for tat (eye for an eye strategy)

strategy in which -playing cooperatively at first -do whatever the other player did previously (cheat=being mean, cooperative=cooperative in future)

Game theory

study of behavior in situations of interdependence -profit depends on other players actions as well as their own

Payoff

the reward received by a player in a game, such as profit earned by an oligopolist, is that player's payoff

Collusion

two firms cooperate to raise their joint profits -call each other, agree to raise prices -illegal in U.S