Economics: Oligopoly and Market Strategy Definitions

A set of vocabulary flashcards covering key definitions for oligopoly markets, firm mergers, game theory, and strategic behavior as provided in the lecture notes.

Oligopoly

a market with few firms

Nash equilibrium

an outcome such that no firms/consumers have an incentive to change their actions given the actions of other firms/consumers

Game theory

a mathematical framework used to analyze strategic interactions

Duopoly

a market with two firms (special case of oligopoly)

Residual demand

a demand expression that shows an individual firm’s influence on market price relative to other firms and consumer preferences

Best response function

an expression that gives a firm’s profit-maximizing production level given the production level of other firms

Horizontal merger

a merger between firms engaged in the same business activity

Vertical merger

a merger between firms that are aligned in the same production process (i.e. upstream and downstream firms)

Upstream firm

a firm that is involved in a part of the production process that is chronologically further from the consumer market

Downstream firm

a firm that is involved in the production process nearer to the consumer market

Double marginalization

occurs when upstream and downstream firms have market power and apply price markups

Market foreclosure

occurs when firms in a market are forced out by actions of other firms in the market

Vertical contract

contracts between upstream and downstream firms

Two-part (franchising) contract

a contract that defines an intermediate price (between upstream and downstream firms) and a revenue-sharing sum between vertically related firms

Service competition

occurs when firms are under pressure to provide levels of service that influence consumer demand

Free riding

occurs when consumers use information gained from one firm to make purchases from another firm

Retail price maintenance (RPM) agreement

an agreement by which an upstream firm forces a retail price (usually a minimum price) on downstream retail firms

Exclusive territories

a contract by which downstream firms are assigned separate markets by an upstream firm

Limiting behavior/strategies

behaviors and strategies by incumbent firms that are intended to prevent entry into a market or force the exit of rival firms

Limit output

an incumbent’s output level such that new entrants or rivals will not be profitable in a market; it is not a profit-maximizing level of output

Moral hazard

occurs when an action that is used to remedy a problem can create incentives for the same problem to come back in the future

Exclusivity contract

contracts in which downstream firms agree to only purchase from a particular upstream firm