ECON 211 Chapter 17 Oligopoly

oligopoly

market structure in which there are few firms selling similar or identical goods

in oligopoly, actions of 1 firm can

directly affects profits of others

strategic decision making

decision making in interactive situations

game theory

study of strategic decision making

collusion

agreement among firms about prices and quantity

cartel

when firm collude to act as if they were a single monopoly

equilibrium

situation in which neither firms has incentive to unilaterally change behavior

equilibrium output is not where they are both better off, but creates

tesnsion between cooperation and self-interest (prisoner’s dilemma)

why is it difficult to maintain cartels?

illegal, tension between cooperation and self-interest, potential for new firms

1st common element of every game

player, in which participants in a game decide on actions based on actions of others

2nd common element of every game

strategies, which is a plan of action that players take

3rd common element of every game

payoffs, which is an outcome of which the player receives for playing the game

optimal strategy

strategy of a player that provides the highest expected payoff taking strategies of other players given

dominant strategy

strategy of a player that is always the best response, regardless of strategies by other players

nash equilibrium

outcome in which no player has incentive to voluntarily change strategy

simultaneous games

game in which players chose strategies simultaneous without knowing others’ strategies

to solve simultaneous games, use

normal form

normal form

use payoff matrix to organize players, strategies, and payoffs