Micro Chapter 14: Oligopoly and Strategic behavior

To gain further insight into oligopolistic pricing and output behavior, the three distinct pricing models:

(1) the kinked-demand curve, (2) collusive pricing, and (3) price leadership.

__________ such as scale economies, control of patents or strategic resources, or the ability to engage in retaliatory pricing characterize oligopolies. Oligopolies may result from internal growth of firms, mergers, or both.

Barriers to entry

The price leader often communicates impending price adjustments to the industry through speeches by major executives, trade publication interviews, or press releases. By publicizing "the need to raise prices," the price leader seeks agreement among its competitors regarding the actual increase.

Communications

_______- reveals that (a) oligopolies are mutually interdependent in their pricing policies, (b) collusion enhances oligopoly profits, and (c) there is a temptation for oligopolists to cheat on a collusive agreement.

Game theory

the __________ measures the degree of market power in an industry by summing the squares of the percentage market shares held by the individual firms in the industry.

Herfindahl index

___________ In recent decades foreign competition has increased rivalry in a number of oligopolistic industries—steel, automobiles, video games, electric shavers, outboard motors, and copy machines, for example. This has helped to break down such cozy arrangements as price leadership and to stimulate much more competitive pricing.

Increased foreign competition

Because price changes always carry the risk that rivals will not follow the lead, price adjustments are made only infrequently. The price leader does not respond to minuscule day-to-day changes in costs and demand. Price is changed only when cost and demand conditions have been altered significantly and on an industrywide basis as the result of, for example, industrywide wage increases, an increase in excise taxes, or an increase in the price of some basic input such as energy. In the automobile industry, price adjustments traditionally have been made when new models are introduced each fall.

Infrequent Price Changes

The price leader does not always choose the price that maximizes short-run profits for the industry because the industry may want to discourage new firms from entering. If the cost advantages (economies of scale) of existing firms are a major barrier to entry, new entrants could surmount that barrier if the price leader and the other firms set product price high enough. New firms that are relatively inefficient because of their small size might survive and grow if the industry sets price very high. So, in order to discourage new competitors and to maintain the current oligopolistic structure of the industry, the price leader may keep price below the short-run profit-maximizing level. The strategy of establishing a price that blocks the entry of new firms is called _____ ?

Limit Pricing

_________ Recall that some oligopolists may purposely keep prices below the short-run profit-maximizing level in order to bolster entry barriers. In essence, consumers and society may get some of the benefits of competition—prices closer to marginal cost and minimum average total cost—even without the competition that free entry would provide.

Limit pricing

At the ____________ both rivals see their current strategy as optimal given the other firm's strategic choice. ________is the only outcome in the payoff matrix that, once achieved, is stable and therefore will persist.

Nash equilibrium

___________- entails a type of implicit understanding by which oligopolists can coordinate prices without engaging in outright collusion based on formal agreements and secret meetings.

Price leadership

__________ Over time, oligopolistic industries may foster more rapid product development and greater improvement of production techniques than would be possible if they were purely competitive. Oligopolists have large economic profits from which they can fund expensive research and development (R&D). Moreover, the existence of barriers to entry may give the oligopolist some assurance that it will reap the rewards of successful R&D. Thus, the short-run economic inefficiencies of oligopolists may be partly or wholly offset by the oligopolists' contributions to better products, lower prices, and lower costs over time

Technological advance

__________ is an efficiency-enhancing activity. It is a relatively inexpensive means of providing useful information to consumers and thus lowering their search costs. By enhancing competition, advertising results in greater economic efficiency. By facilitating the introduction of new products, advertising speeds up technological progress.

advertising

The most comprehensive form of collusion is the _______, a group of producers that typically creates a formal written agreement specifying how much each member will produce and charge. Output must be controlled—the market must be divided up—in order to maintain the agreed-upon price. The collusion is overt, or open to view.

cartel

However, by controlling price through ______, oligopolists may be able to reduce uncertainty, increase profits, and perhaps even prohibit the entry of new rivals.

collusion

In many other instances ________ is much subtler. Unwritten, informal understandings are frequently made at cocktail parties, on golf courses, through phone calls, or at trade association meetings. In such agreements, executives reach verbal or even tacit (unspoken) understandings on product price, leaving market shares to be decided by nonprice competition. Although these agreements, too, violate antitrust laws—and can result in severe personal and corporate penalties—the elusive character of informal understandings makes them more difficult to detect.

collusion

We can say that _______ occurs whenever firms in an industry reach an agreement to fix prices, divide up the market, or otherwise restrict competition among themselves.

collusion

An oligopoly may be either a homogeneous oligopoly or a __________ oligopoly, depending on whether the firms in the oligopoly produce standardized (homogeneous) or differentiated products

differentiated

____________ an option that is better than any alternative option regardless of what the other firm does.

dominant strategy

The ___________ shows the percentage of an industry's sales accounted for by its four largest firms

four-firm concentration ratio

The best way to play such a game depends on the way one's opponent plays. Players (and oligopolists) must pattern their actions according to the actions and expected reactions of rivals. The study of how people behave in strategic situations is called ?

game theory

___________—competition between two products associated with different industries

interindustry competition

The ____________ analysis has two shortcomings. First, it does not explain how the going price gets to be at P0 in the first place. It only helps explain why oligopolists tend to stick with an existing price. It explains price inflexibility but not price itself. -Second, when the macroeconomy is unstable, oligopoly prices are not as rigid as the it implies.

kinked-demand

It is therefore reasonable to assume that the noncollusive oligopolist faces the_____________ . Demand is highly elastic above the going price P0 but much less elastic or even inelastic below that price.

kinked-demand curve

___________ a situation in which each firm's profit depends not just on its own price and sales strategies but also on those of the other firms in its highly concentrated industry.

mutual interdependence

If rivals match a price cut but ignore an increase, the marginal-revenue curve of the oligopolist will also have an _______ shape. It, too, will be made up of two segments: the dark gray left-hand part of marginal-revenue curve and the dark gray right-hand part of marginal-revenue curve

odd

neither productive efficiency (P = minimum ATC) nor allocative efficiency (P = MC) is likely to occur under ______.

oligopoly

___________ a market dominated by a few large producers of a homogeneous or differentiated product. Because of their "fewness," they have considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions.

oligopoly,

The game and payoff matrix is a________ game because the firms select their optimal strategies in a single time period without regard to possible interactions in subsequent time periods.

one-time

Positive-sum, zero-sum, and negative-sum games have combined _________ across all players that sum to, respectively, something positive, zero, and something negative. Positive-sum games correspond to "win-win" situations; zero-sum games to "I win-you lose" situations; and negative-sum games to "we both lose" situations.

payoffs

Because firms are few in oligopolistic industries, each firm is a "price maker"; like the monopolist, it can set its price and output levels to maximize its profit

price maker

Price leadership in oligopoly occasionally breaks down, at least temporarily, and sometimes results in a _______.

price war

oligopolistic firms can increase their profits, and influence their rivals' profits, by changing their ?

pricing strategies

In a ___________—a game that recurs more than once—the optimal strategy may be to cooperate and restrain oneself from competing as hard as possible so long as the other firm reciprocates by also not competing as hard as possible

repeated game

The location and shape of an oligopolist's demand curve depend on how the firm's _____ will react to a price change introduced by Arch.

rivals

Advertising can also be ______.The advertising campaign of one fast-food hamburger chain may be offset by equally costly campaigns waged by rivals, so each firm's demand actually remains unchanged.

self-canceling

In such a _____________, the final outcome may depend critically upon which firm moves first since the first mover may have the opportunity to establish a Nash equilibrium that works in its favor.

sequential game

________, we simply mean self-interested behavior that takes into account the reactions of others

strategic behavior

The way you determine the Nash Equilibrium when a game is displayed in extensive form is by using a two-stage process called backward induction that first divides the overall game tree into nested __________ before working backwards from right to left—from the profits shown at each terminal node on the right to the preceding decisions that are necessary to end up at any particular terminal node.

subgames

It includes the ______ oligopoly, in which two or three firms dominate an entire market, and the loose oligopoly, in which six or seven firms share, say, 70 or 80 percent of a market while a "competitive fringe" of firms shares the remainder. It includes both differentiated and standardized products.

tight