AP Microeconomics Oligopoly Notes

interdependent

the profits of each firm depends on the actions of the other firms in the market

duopoly

oligopoly consisting of only 2 firms — each are known as duopolists

collusion

firms cooperating to raise joint profits

cartel

a group of firms that agree to restrict output in order to increase prices and their joint profits

noncooperative behavior

when firms act in their own self-interest, ignoring the effects of their actions on each other’s profits

payoff matrix

shows how the payoff of each participant (2 people) depends on the actions of both participants

helps us understand interdependence situations

dominant strategy

when it is a player’s best option regardless of the action taken by the other person

Nash/Noncooperative Equilibrium

when each player chooses an action that maximizes their payoff, GIVEN the other player’s actions

tit for tat strategy

playing cooperatively, and then copying the actions of the other player in the previous period

tacit collusion

when firms HAVE NOT formed any formal agreement and limit production and raise prices increase each other’s profit

price war

when tacit collusion breaks down and aggressive price competition causes prices to collapse

periodically happens in the burger, airline, and grocery industries

price leadership

one firm sets a price and other firms follow

nonprice competition

using things other than price to try and increase sales (advertising, warranties, loyalty programs, etc)

is collusion legal or illegal?

It is illegal in the U.S., but legal in some other countries

game theory

the study of behavior in situations of interdependence

payoff

an individual player’s payoff or reward in a game (or oligopolists profit)

The Prisoner’s Dilemma

Between 2 players, where they can both cooperate and choose a mutually beneficial option, or betray their partner for individual gain

who is Nash equilibrium named after?

John Forbes Nash, Jr.