Econ 201 Chapter 14
Review 14.4
A Nash equilibrium occurs when both firms are simultaneously playing dominant strategies, so that neither firm has any incentive to alter its behavior.
kinked-demand curve
A demand curve that has a flatter slope above the current price than below the current price. Applies to a noncollusive oligopoly firm if its rivals will match any price decrease but ignore any price increase.
Review 14.4
A dominant strategy for a firm in a two-firm game is a strategy that leads to better outcomes for the firm no matter what the other firm does.
prisoner's dilemma
A famous game analyzed in game theory in which two players who could have reached a mutually beneficial outcome through cooperation will instead end up at a mutually inferior outcome as they pursue their own respective interests (instead of cooperating). Helps to explain why collusion can be difficult for oligopoly firms to achieve or maintain.
cartel
A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically.
oligopoly
A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.
collusion
A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition.
sequential game
A strategic interaction (game) between two or more parties (players) in which each party moves (makes a decision) in a predetermined order (sequence).
simultaneous game
A strategic interaction (game) between two or more parties (players) in which every player moves (makes a decision) at the same time.
one-time game
A strategic interaction (game) between two or more parties (players) that all parties know will take place only once.
repeated game
A strategic interaction (game) between two or more parties (players) that all parties know will take place repeatedly.
Review 14.3
Advertising can help reduce monopoly power by presenting consumers with useful information about existing products and by helping to introduce new products
Review 14.3
Advertising can hurt consumers and competition by promoting monopoly power and creating entry barriers.
Oligopolistic firms do which of the following when they change their pricing strategies?
Affect profits and influence the profits of rival firms
price leadership
An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes.
differentiated oligopoly
An oligopoly in which firms produce a differentiated product.
homogeneous oligopoly
An oligopoly in which firms produce a standardized product.
Review 14.1
An oligopoly is composed of relatively few firms producing either homogenous or differentiated products; these firms are mutually interdependent.
What is the Nash equilibrium?
An outcome in the payoff matrix from which neither firm wants to deviate since the current strategy is optimal given the rival's strategic choice.
Review 14.1
Barries of entry in oligopoly include scale economies, control of patents or strategic resources, and the ability to engage in retaliatory pricing. Oligopolies may result from internal growth of firms, mergers, or both.
How can oligopolistic firms influence their profits and the profits of their rivals?
By changing pricing strategies
Review 14.2
Cartels agree on production limits and set a common price to maximize the joint profit of their members as if each were a subsidiary of a single pure monopoly
Which of the following are obstacles to collusion in an oligopolistic industry?
Cheating Antitrust laws Recession Demand and cost differences
Review 14.2
Collusion among oligopolists is difficult because of (a) demand and cost differences among sellers, (b) the complexity of output coordination among producers, (c) the potential for cheating, (d) a tendency for agreements to break down during recessions, (e) the potential entry of new firms, and (f) antitrust laws.
Firms in an oligopoly always produce a homogeneous product
False
Which of the following IS NOT a characteristic of oligopoly?
Firms have no control over their price.
The study of how people behave in strategic situations is called____________ theory
Game
Review 14.1
Game theory reveals that (a) oligopolies are mutually interdependent, (b) collusion enhances oligopoly profits, and (c) there is temptation for oligopolists to cheat on a collusive agreement
empty threat
In a sequential game with two players, a noncredible (bluffing) statement made by Player 1 that threatens a penalizing action against Player 2 if Player 2 does something that Player 1 does not want Player 2 to do. Opposite of credible threat.
credible threat
In a sequential game with two players, a statement made by Player 1 that truthfully (credibly) threatens a penalizing action against Player 2 if Player 2 does something that Player 1 does not want Player 2 to do. Opposite of empty threat.
dominant strategy
In a strategic interaction (game) between two or more players, a course of action (strategy) that a player will wish to undertake no matter what the other players choose to do.
positive-sum game
In game theory, a game in which the gains (+) and losses (−) add up to more than zero; one party's gains exceed the other party's losses. A strategic interaction (game) between two or more parties (players) in which the winners' gains exceed the losers' losses so that the gains and losses sum to something positive.
negative-sum game
In game theory, a game in which the gains (+) and losses (−) add up to some amount less than zero; one party's losses exceed the other party's gains. A strategic interaction (game) between two or more parties (players) in which the winners' gains are less than the losers' losses so that the gains and losses sum to a negative number.
zero-sum game
In game theory, a game in which the gains (+) and losses (−) add up to zero; one party's gain equals the other party's loss. A strategic interaction (game) between two or more parties (players) in which the winners' gains exactly offset the losers' losses so that the gains and losses sum to zero.
first-mover advantage
In game theory, the benefit obtained by the party that moves first in a sequential game. A situation that occurs in a sequential game if the player who gets to move first has an advantage in terms of final outcomes over the player(s) who move subsequently.
Review 14.2
In the kinked-demand theory of oligopoly, price is relatively inflexible because a firm contemplating a price change assumes that its rivals will follow a price cut and ignore a price increase.
Companies often merge to ______ monopoly power.
Increase
What are the positive effects of large oligopolists advertising?
It enhances competition and reduces monopoly power. It lowers search costs of information for consumers.
What are three models used to study pricing and output by oligopolies?
Kinked-demand curve model Price leadership model Collusive pricing model
What is the only stable outcome in a payoff matrix?
Nash equilibrium
If the firms, Chipco and Dramco, represented by the payoff matrix decided to collude to reach a common strategy, which strategy would they jointly pursue?
National strategies, cell D
Oligopolistic behavior implies that oligopolists prefer competition ______.
Oligopolistic behavior implies that oligopolists prefer competition ______.
Review 14.3
Oligopolists emphasize nonprice competition because (a) advertising and product variations are harder to match than price changes and (b) oligopolists frequently have ample resources to fund nonprice competition.
Which are barriers to entry in both monopolies and oligopolies?
Patents Preemptive pricing Ownership and control of raw materials Large capital investment
Review 14.4
Positive-sum, zero-sum, and negative-sum games have combined payoffs across all players that sum to, respectively, something positive, zero, and something negative. Positive-sum games correspond to "win-win" situations, while zero-sum games correspond to "I win-you lose" situations.
The greater the difference in demand and costs between firms, the more difficult it is for firms to agree on___________
Price
When members of an oligopoly react to price changes by a dominant firm, the ____________, _____________ model is most applicable. (Enter one word per blank.)
Price Leadership
Review 14.2
Price leadership involves an informal understanding among oligopolists to match any price change initiated by a designated firm (often the industry's dominant firm)
What are three models used to study pricing and output by oligopolies?
Price leadership model Kinked-demand curve model Collusive pricing model
Review 14.4
Reciprocity can improve outcomes in repeated games
price war
Successive, competitive, and continued decreases in the prices charged by firms in an oligopolistic industry. At each stage of the price war, one firm lowers its price below its rivals' price, hoping to increase its sales and revenues at its rivals' expense. The war ends when the price decreases cease.
interindustry competition
The competition for sales between the products of one industry and the products of another industry.
import competition
The competition that domestic firms encounter from the products and services of foreign producers.
Based on the payoff matrix, if the two firms agreed to both follow national strategies there is an incentive for them to cheat. If one of the firms cheats on this agreement, what will happen?
The game would eventually end in the Nash equilibrium (cell A). The game would temporarily move to either cell B or cell C.
Which of the following is a model used to examine oligopolistic pricing? Multiple choice question.
The kinked-demand curve model
What is the four-firm concentration ratio?
The percentage of total industry sales accounted for by the four largest firms
Nash equilibrium
The situation that occurs in some simultaneous games wherein every player is playing his or her dominant strategy at the same time and thus no player has any reason to change behavior.
game theory
The study of how people behave in strategic situations in which individuals must take into account not only their own possible actions but also the possible reactions of others. Originally developed to analyze the best ways to play games like poker and chess.
Which statement is true about oligopolies?
They do not achieve allocative efficiency because their price exceeds marginal cost.
Which statement is true about oligopolies? Multiple choice question.
They may produce homogeneous or differentiated products.
Based on the figure, why would a firm deviate from a collusive outcome as presented in the payoff matrix?
To increase its profit
Which are reasons that that firms merge?
To increase market share To increase control over the product's price To obtain lower input prices To increase economies of scale
Oligopolies are comprised of ______.
a few large producers
Firms in oligopolistic industries are "price makers" because such firms ______.
are few in number
What term means "cooperation with rivals?"
collusion
Advertising benefits society by ______.
conveying information to consumers
Oligopolies have ______.
fewer firms than monopolistic competition
The study of how one firm reacts to the actions taken by another firm or individual when implementing a strategy is called _____.
game theory
An oligopoly firm's demand curve will be kinked if ______.
its rivals match price decreases but ignore price increases
In the _______ model of oligopoly, firms react to price decreases but ignore price increases by other firms.
kinked-demand
In the _______ model of oligopoly, firms react to price decreases but ignore price increases by other firms. Multiple choice question.
kinked-demand
Advertising can reduce efficiency by ______.
manipulating consumer preferences providing misleading information
Oligopolies are not a desirable market structure because they achieve ______.
neither productive efficiency nor allocative efficiency
Demand and cost differences, the number of firms in the industry, and the potential for cheating all represent __________ to collusion. (Enter one word in the blank.)
obstacles, obstacle, barriers, barrier, impediments, challenge, challenges, or threats
A type of implicit understanding used by oligopolists to coordinate prices without engaging in outright collusion is known as ______.
price leadership
Oligopolists often compete through product development and advertising instead of price because ______.
product development and advertising are relatively difficult to copy
Barriers to entry into an oligopoly most resemble those of a ______.
pure monopoly
Barriers to entry into an oligopoly most resemble those of a ______. Multiple choice question.
pure monopoly
When a game between rivals occurs more than once, it is called a ______ game.
repeated
A game that is played more than once between rivals is a____________ game. (Enter one word in the blank.)
repeated, repeat, or repetitive
The four-firm concentration ratio is based on the ___.
sales of the largest firms in an industry
According to the kinked-demand model of oligopoly, if two of three firms ignore a price decrease by the third firm ______.
the third firm will gain sales because the other two firms' demand curves become more inelastic, relative to the third firm's demand curve
To reduce uncertainty or increase profits, oligopolists may change their prices ______.
through collusion
In a ___________ game one firm moves first, committing to a strategy and then the rival firm responds.
Sequential
Advertising can persuade consumers to pay higher prices for products that are well ______________ instead of purchasing unadvertised products with lower prices. (Enter one word in the blank.)
advertised, advertise, advertized, advertize, marketed, or acclaimed
A firm in an oligopolistic market ______.
can set its price and output to maximize profits
Based on the figure, if RareAir honors an agreement with Uptown to price high, and Uptown needs to increase profits due to stockholder pressure, Uptown will price ______.
low to receive a payout of $15