Oligopoly and Game Theory

Flashcards created to help review the key concepts of oligopoly and game theory.

What is an oligopoly?

A market structure in which a small number of interdependent firms compete.

What is the four-firm concentration ratio?

It is the fraction of an industry's sales accounted for by its four largest firms, indicating market power.

What does a four-firm concentration ratio larger than 40 percent typically indicate?

It indicates an oligopoly.

What are some of the limitations of four-firm concentration ratios?

They do not account for foreign competition, are based on national markets, and may not accurately define market boundaries.

What is a key barrier to entry that contributes to the existence of oligopolies?

Economies of scale, which lower long-run average costs as output increases.

What is considered a government-imposed barrier in oligopolies?

Occupational licensing, patents, tariffs, and quotas that restrict competition.

What is game theory in the context of oligopolies?

The study of how firms make decisions when their outcomes depend on the actions of other firms.

What is a dominant strategy in game theory?

A strategy that is the best for a firm regardless of what strategies other firms choose.

What is a Nash equilibrium?

A situation in a game where each firm chooses the best strategy given the strategies chosen by others.

What is the Prisoner's Dilemma?

A situation in which pursuing dominant strategies leads to a worse outcome for all players.

What is implicit collusion?

A type of collusion where companies coordinate actions without explicit communication.

What is price leadership in oligopolies?

A form of implicit collusion where one firm changes its price and others in the industry follow.