ECO CH14 Oligopoly

oligopoly

an industry with

- only a few firms that compete

- low ease of entry

- sell either identical or different products

ex. streaming services

concentration ratio

measure of the extent of competition in an industry

barriers to entry

anything that keeps new firms from entering an industry in which firms are earning economic profit

what are the main barriers to entry?

1. economies of scale

2. ownership of a key input

3. govt imposed barriers

economies of scale

the situation in which a firm's long-run average cost falls as it increases the quantity of output it produces

- most important barriers to entry

describe the significance of economies of scale

- If economies are scale are NOT significant, there will be low barriers to entry, allowing for a large number of firms and it will be competitive

- If it is significant, there will be high barriers to entry

ownership of a key input

If production of a good requires a particular input, then control of that input can be a barrier to entry

what are the 3 important types of govt imposed barriers?

1. patent

2. imposing tariffs and quotas

3. occupational licensing

patent

the exclusive legal right to produce a product for a period of 20 years from the date the patent application is filed with the government

- allows firms to charge higher prices and make a profit

how do tariffs and quotas create barriers to entry?

allow US companies to charge prices that are much higher than prices that companies outside the united states charge

what is the effect of occupational licensing?

it raises the prices of services

game theory

the study of the decisions firms in industries where the profits of a firm depend on its interactions with other firms

what 3 characteristics do games share?

1. rules

2. strategies that players employ to attain their objectives

3. payoffs (results of the interactions among the player's strategies)

business strategy

a set of actions that a firm takes to achieve a goal, such as maximizing profits

duopoly

an oligopoly with two firms

payoff matrix

a table that shows the payoffs that each firm earns from every combination of strategies by firms

collusion

an agreement among firms to charge the same price or otherwise not to complete

- illegal!

dominant strategy

the best strategy for a firm, no matter what other strategies use

- occurs at equilibrium where each firm is maximizing its profit given the price chosen by the other firm

nash equilibrium

a situation in which each firm chooses the best decision, given the strategies chosen by other firms

cooperative equilibrium

an equilibrium in a game in which players cooperate to increase their mutual payoff

noncooperative equilibrium

an equilibrium in a game in which players do not cooperate but pursue their own self-interest; common outcome

Prisoner's dilemma

a game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off

cartel

a group of firms that collude by agreeing to restrict output to increase prices and profits

what are the 5 competitive forces?

1. competition from existing firms

2. the threat of potential entrants

3. competition from substitute goods or services

4. the bargaining power of buyers

5. bargaining power of suppliers