Oligopoly Ch 17

Oligopoly

A market with 2-4 sellers, usually big firms, that have homogenous products.

Duopoly

An oligopoly with only two members

Collusion

An agreement among firms in a market about quantities to produce or prices to charge.

Cartel

A group of firms acting in unison.

Nash equilibrium

A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the others have chosen. Always results in a suboptimal outcome.

Output effect

If P>MC, selling more output raises profits.

price effect

raising production increases market quantity, which reduces market price and reduces profits on all units sold.

game theory

the study of how people behave in strategic situations

Prisoner’s dilemma

2 criminals, the police have them on a weapons charge with a 1 year prison time. The police suspect they robbed a bank, but need a confession from one or both of them. They separate the criminals and offer each of them the same deal. If confess and your partner doesn’t, you go free and they get 20 years. If both confess, 8 years. If neither confess, 1 year. Both confess because either 0/8 years vs 1/20.

dominant strategy

the best strategy for a player to follow regardless of the strategies chosen by the other players.

tacit collusion

no paper trails, just “understanding” among firms.

Resale Price Maintenance

requiring a retailer to sell a good at a certain price determined by the wholesaler.pr

predatory pricing

charging too low prices, driving out competitors

tying

in order to buy a good, must purchase another good at the same time.