Key Concepts in Oligopoly and Game Theory

Oligopoly

Few sellers offer similar or identical products.

Imperfect Competition

No one firm has a monopoly, but producers can potentially affect market prices.

Duopoly

Oligopoly consisting of 2 firms.

MR

ᇫTR/ᇫQ

Noncooperative Behavior

Firms ignoring effects of their actions on each others' profits.

Cooperation

Firms may be profitable, but are unstable, likely to cheat.

Collusion

Agreement among firms in a market about quantities to produce or prices to charge.

Cartel

Agreement by several producers to restrict output in order to increase their joint profits.

Nash Equilibrium

Economic participants interacting with each other and choosing their best strategy given the strategies that all the others have chosen.

Output Effect

P > MC, selling more output raises profits.

Price Effect

Raising production increases market quantity reducing market price.

Game Theory

Study of how people behave in strategic solutions.

Dominant Strategy

Best for a player in a game regardless of strategies chosen by other players.

Prisoners' Dilemma

2 captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial.

Noncooperative Oligopoly Equilibrium

Bad for oligopoly firms, prevents them from achieving monopoly profits.

Strategies May Lead to Competition

Rival reneges in one round, you renege in all subsequent rounds.

Tacit Collusion

Manage to act as if they had an agreement but is in legal jeopardy.

Price War

Collusion breaks down and prices collapse.

Product Differentiation

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

Nonprice Competition

Competing through advertisements.

Price Leadership

One firm sets its price first, and other firms follow.