Monopolistic Competition, Oligopoly, and Game Theory Flashcards

Flashcards for Monopolistic Competition, Oligopoly, and Game Theory

Characteristics of Monopolistic Competition

Many buyers and sellers, differentiated products, no barriers to market entry or exit, some control over price, no long-run economic profit.

Informational Advertising

Informs consumers about aspects of a product and reduces search costs.

Persuasive Advertising

Influences consumers’ emotions and tends to drive up the cost of products.

Monopolistic Competition in the Long Run

Firms earn no economic profit; P = ATC.

Characteristics of Oligopoly

Relatively few firms, mutual interdependence, substantial barriers to market entry, shared market power and considerable control over price, potential for long-run economic profit.

Cartel

An agreement between firms (or countries) to formally collude on price and output, then agree on the distribution of output.

Cartels

Reduce overall supply to increase prices and profit.

Cartels are more stable when:

They have few members and each member has similar goals; They are maintained with legal provisions; Firms are unable to differentiate their products; Each firm has a similar cost structure; There are significant barriers to entry.

Game Theory

The study of how individuals and firms make strategic decisions to achieve goals when other players or factors can influence that outcome.

Components of a Game

Players, information, strategies, outcomes, payoffs.

Sequential-Move Games

One player at a time makes a move.

Simultaneous-Move Games

Actions occur at the same time.

Nash Equilibrium

Occurs when all players in a game use an optimal strategy in response to all other players’ strategies

Dominant Strategy

Occurs when a player chooses the same action no matter what other players choose.

Prisoner’s Dilemma

Occurs in noncooperative games when The Nash equilibrium outcome is inferior to another outcome that can be achieved with cooperation.

Repeated Games

Games can be endlessly repeated, or repeated a specific number of rounds and Lead to different types of strategies that take into account past behavior of rivals.

Use of Trigger Strategies

Actions are contingent on the other player’s past decisions.

Grim Trigger

Retaliation is permanent.

Trembling Hand Trigger

Allows for a mistake by an opponent before one retaliates.

Tit-For-Tat

Cooperation is rewarded and defection is punished.

Leadership Games

Competitive games in which one player is dominant

Chicken Games

Competitive games in which players hold out for the optimal outcome and if neither side gives in, the worst outcome occurs