Module 5 - Oligopoly Lecture Review

A set of vocabulary-style flashcards covering the key concepts, models, and game theory components of Oligopoly markets as discussed in the Module 5 lecture.

Oligopoly

A market structure characterized by a few firms, such as airlines, oil & gas, and cell phone service providers, where market outcomes are jointly determined by all firms’ decisions.

Strategic interaction

The key concern in oligopoly markets, where firms’ decisions interact with one another, a concept that does not exist in perfect competition or monopoly.

Nash equilibrium

The equilibrium that addresses strategic interaction in an oligopoly market.

Players (Game Theory)

One of the four components of game theory, identifying who is making the decisions.

Actions (Game Theory)

One of the four components of game theory, referring to the decision variables available to the players.

Timing (Game Theory)

One of the four components of game theory, determining whether players make decisions at the same time or in turn.

Payoff (Game Theory)

One of the four components of game theory, representing the expected outcomes, such as profit, resulting from decisions.

Cournot model

A model of oligopoly applied to markets with a few firms that compete through quantity and production, typically making simultaneous decisions.

Residual demand

An expression that defines an individual firm's influence over the market price given the quantity decisions of other firms in the market.

Best response function

A conceptual tool that indicates a firm's profit-maximizing quantity depends on the quantity chosen by another firm, representing strategic interaction.

Price markup (Cournot)

A degree of market power in Cournot firms that is greater than perfect competition but not as extreme as monopoly, allowing for positive economic profit unless fixed costs are too high.

Bertrand model

A model of oligopoly where a few firms compete on price rather than quantity, often involving non-differentiated goods and simultaneous timing.

$$P = MC$$

The predicted price outcome in a basic Bertrand market where firms have identical marginal costs, high production capacity, and produce non-differentiated goods.

Capacity constraints (Bertrand)

A situation where firms cannot meet demand at $P = MC$, leading to an equilibrium price where firms sell everything they can, such as in the example where price is P = 30 - (12 + 12) = $6.

Product differentiation

A condition that allows breweries or firms to price above marginal cost based on the value consumers place on specific differentiated characteristics.

Availability

A common strategy for product differentiation based on how easy it is for consumers to access the product.

Quality

A strategy for product differentiation based on perceived or real differences in how well a product is made or provided.

Promotion

A strategy for product differentiation involving actions that inform or capture consumers about a particular product.

Product characteristics

A strategy for product differentiation involving certain aspects of a product that appeal to consumers.

Price competition conditions (EV Article)

The three factors relevant to BMW and Volkswagen relative to Chinese competitors: different marginal costs, high production capacity, and lack of differentiation.