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Chapter 14
Oligopoly
| Term | Definition |
|---|---|
| Oligopoly | market that is dominated by a small number of firms |
| Imperfect Competition | no one firm has a monopoly, but producers can affect market prices |
| Oligopoly behavior | complicated to do bc it's not a single firm considering its cost and pricing in a vaccum (like perfectly competitive firms and monopolies) |
| The profits of a large firm depend heavily on.... | actions taken by other large firms |
| Herfindahl-Hirschman Index (HHI) | sum of the squares of each firm's share of market sales Ex: if there are 3 firms with 60%, 25%, and 15% market share each: HHI=60^2+25^2+15^2=4,450 -indicates oligopoly |
| HHI of less than 1,000 indicates | strongly competitive market |
| HHI of 1,000 to 1,800 indicates | somewhat competitive market |
| HHI above 1,800 indicates | oligopoly |
| If HHI is above 1,000 | a merger that results in a significant increase in the HHI will receive special scrutiny and is likely to be disallowed |
| Collusion | firms cooperating to raise each others' profits/strongest form is a cartel |
| Cartel | strongest form of collusion/ an agreement by several producers to restrict output in order to increase their joint profits |
| OPEC | limits production for each member nation to raise oil prices and profits |
| Noncooperative behavior | Firms ignoring the effects of their actions on each others' profits |
| Game Theory | study of behavior in situations of interdependence; a way of predicting outcomes in strategic situations like oligopolies |
| Duopoly | an oligopoly consisting of only two firms/ with only two firms in the industry, each realizes that profits would be higher if it limited its production (and kept prices higher) |
| Prisoner's dilemma | situation when each firm has incentive to cheat but both are worse off if both cheat/ based on two principles: each player has an incentive to choose an action that benefits itself at the other player's expense/if they act this way both are worse off |
| A dominant strategy | strategy that is a player's best action regardless of the action taken by the other player/depending on the payoffs a player may or may not have a dominant strategy |
| Nash equilibrium (also known as noncooperative equilibrium) | result when each player in a game chooses the action that maximizes his or her payoff given the actions of other players, ignoring the effects of his or her action on the payoffs received by those other players |
| In game theory, the strategy that has a higher payoff than any other strategy-no matter what the other player does- is also know as the: | dominant strategy |
| Tit for tat | strategy of playing cooperatively at first, then doing whatever the other player did in the previous period |
| Antitrust policies | efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies |
| Tacit collusion | unspoken agreements/ limited by a number of factors including: -less concentration -complex products and pricing scheme -differences in interests - bargaining power of buyers |
| Price War | when collusion breaks down and prices collapse there is a price war |
| Product differentiation | an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry |
| Nonprice competition | oligopolists often avoid competing directly on price, engaging in nonprice competition through advertising and other means instead |
| Price leadership | one firm sets its price first, and other firms then follow |
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kthomas96
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