chp 26- Oligopoly and Strategic Behavior in Economics

Oligopoly

An important market structure in which a few large firms comprise an entire industry.

Interdependence

A situation where each seller knows that the other sellers will react to its changes in prices, quantities, and qualities.

Strategic dependence

A situation in which one firm's actions with respect to price, quality, advertising, and related changes may be strategically countered by the reactions of one or more other firms in the industry.

Economies of scale

Cost advantages obtained by firm due to the scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

• cost advantages experienced / decrease in costs when it increases its level of output

Vertical merger

The joining of a firm with another to which it sells an output or from which it buys an input.

• different stages of supply chain

Horizontal merger

The joining of firms that are producing or selling a similar product.

Resource misallocation

A situation where resources are not distributed efficiently, leading to a loss of economic efficiency.

Two-sided markets

Markets in which two distinct user groups interact through an intermediary or platform, often benefiting from network effects.

Cartel

A collusive arrangement under which several firms essentially seek to replicate the production and pricing of a monopolist.

Reaction function

The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry.

Game theory

A way of describing the various possible outcomes in any situation involving two or more interacting individuals when those individuals are aware of the interactive nature of their situation and plan accordingly.

Cooperative game

A game in which the players explicitly cooperate to make themselves better off.

Collusion

Collusion of firms for higher than perfectly competitive rates of return.

Noncooperative game

A game in which the players neither negotiate nor cooperate in any way.

Zero-sum game

A game in which any gains within the group are exactly offset by equal losses by the end of the game.

Negative-sum game

A game in which players as a group lose at the end of the game.

Positive-sum game

A game in which players as a group are better off at the end of the game.

Strategy

Any rule that is used to make a choice, such as 'always pick heads.'

Dominant strategies

Strategies that always yield the highest benefit.

Prisoner's dilemma

A famous strategic game in which two prisoners have a choice between confessing and not confessing to a crime.

Opportunistic behavior

Actions that focus solely on short-run gains because long-run benefits of cooperation are perceived to be smaller.

tit-for-tat strategic behavior

In game theory, cooperation that continues as long as the other players continue to cooperate.

Cheating on the cartel agreement

Each individual member could theoretically increase production to where marginal revenue equals marginal cost, which would lead to higher economic profits.

Enforcing a cartel agreement

Four conditions make it more likely that firms will be able to coordinate their efforts to restrain output and detect cheating: a small number of firms in the industry, relatively undifferentiated products, easily observable prices, and little variation in prices.

Cartel agreements breakdown

Studies have shown that most cartel agreements do not last more than 10 years, often breaking down more quickly due to economic profits providing incentives for new firms to enter the market and variations in overall economic activity.

Market demand curve shift

When the market demand curve shifts leftward in an industry with a cartel, the marginal revenue curve will shift leftward, leading to a decline in the profit-maximizing quantity and price.

Network effect

A situation in which a consumer's willingness to purchase a good or service is influenced by how many others also buy or have bought the item.

Positive market feedback

A tendency for a good or service to come into favor with additional consumers because other consumers have chosen to buy the item.

Negative market feedback

A tendency for a good or service to fall out of favor with more consumers because other consumers have stopped purchasing the item.

Two-sided market

A market where a platform firm provides a good or service that links together two groups of end users, establishing prices that are not necessarily the same for the two groups.

Types of two-sided markets

Four types include audience-seeking markets, matchmaking markets, transaction-based markets, and shared-input markets.

Big data network effect

The phenomenon where online platform firms use collected user data to tailor offerings, generating more data and contributing to oligopolistic concentration.

Two-sided oligopolistic pricing

Oligopolistic platform firms setting prices in a two-sided market must consider group differences in network-effect responses to price changes.

Features of an industry for cartel formation

Conditions that help or hinder efforts to form a cartel include a small number of firms, relatively undifferentiated products, easily observable prices, and little variation in prices.

Functions of two-sided markets

Network effects arise when a consumer's demand for a good or service is affected by how many other consumers also use the item, facilitated by a platform linking groups of end users.

Balancing customer acquisition

Platform firms must maintain a balance between acquiring more customers and obtaining the right customers to ensure favorable market feedback.

network effect

when the value of a product or service increases as more people use it