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Oligopoly
An Oligopoly is a market situation in which there exists very few sellers of an identical good. Each seller knows the other sellers will react to its changes in price and quantity output.
Game theory
Game theory relates to an oligopoly because an oligopoly is a 'game' between the participating firms, who interact by deciding how much of an identical product to produce or what price to charge.
Strategic dependence
Strategic dependence is a situation in which one firm's actions with respect to price, quantity, advertising and related changes may be strategically countered by the reactions of one or more other firms in the industry.
Nash Equilibrium
Nash Equilibrium = (Comp. Output, Comp. Output)
Pareto Outcome
Pareto Outcome = (Monop. Output, Monop. Output)
Co-operate
Firms can co-operate by choosing to charge a high price and limiting output of the product, resulting in monopolist profits spread among the oligopolies.
Act independently
Firms can act independently by increasing their output and lowering their price, resulting in competitive market conditions and profits for the firms in the oligopoly.
Collude
When firms in an oligopoly co-operate, they collude, forming a cartel to limit output, raise price and increase economic profit.
Cartel
A cartel is a group of firms acting together to limit output, raise price and increase economic profit.
Deadweight Loss (DWL)
When firms are acting like a monopolist, quantity supplied is too low and price is too high, resulting in a DWL.
Competitive firm equilibrium
The point where P=MR=MC, indicating firms in an oligopoly are acting like competitive firms.
Market power
Market power is the ability to set the price of the output above marginal cost; the higher the market power, the higher the price.
Four Firm Concentration Ratio
Evaluates the percentage total of sales contributed by the leading four firms in an industry; the higher the percentage of sales, the more market power a firm has.
Four Firm Concentration Ratio Formula
Four Firm Concentration Ratio = sum of sales of top 4 firms / sum of sales in industry.
Example of Four Firm Concentration Ratio
If the sum of sales of an industry is 450 and the top four firms have sales of 150, 100, 80, and 70, then the 4 firm concentration ratio = (150+100+80+70) / 450 = 0.889.
Perfect Monopoly
4 Firm Concentration Ratio = 100%.
Oligopoly/Monopolistic Competition
4 Firm Concentration Ratio = 60%-99%.
Competitive market
4 Firm Concentration Ratio = 0%.
Market efficiency
The higher the ratio, the more market power exists and the less the efficiency of the market; the lower the ratio, the less market power exists and the more efficient the market.
