Monopolistic Competition, Oligopoly, and Game Theory

Flashcards covering the characteristics, pricing models, and strategic behaviors associated with monopolistic competition, oligopolies, and game theory based on the lecture notes.

Monopolistic Competition

A market structure characterized by many buyers and sellers, differentiated products, no barriers to market entry or exit, some control over price, and no long-run economic profit.

Product Differentiation

The process of distinguishing a product from others, which gives a firm some control over price (market power) and is key to success in monopolistic competition.

Informational Advertising

A type of advertising that informs consumers about aspects of a product and reduces search costs.

Persuasive Advertising

A type of advertising that influences consumers' emotions and tends to drive up the cost of products.

Normal Profit

The level of profit earned by monopolistically competitive firms in the long run, where price equals average total cost ($P = ATC$).

Oligopoly

A market structure characterized by relatively few firms, mutual interdependence, substantial barriers to entry, shared market power, and the potential for long-run economic profit.

Mutual Interdependence

A characteristic of oligopoly where the actions and decisions of one firm significantly affect the others in the market.

Cartel

An agreement between firms or countries to formally collude on price and output, then agree on the distribution of output to increase prices and profit.

Kinked Demand Curve Model

A model explaining why oligopoly prices remain stable; it assumes competitors will follow price decreases but not price increases.

Game Theory

The study of how individuals and firms make strategic decisions to achieve goals when other players or factors can influence that outcome.

Simultaneous-move Games

Games in which actions occur at the same time, such as offense and defense in a soccer match.

Sequential-move Games

Games in which one player at a time makes a move.

Nash Equilibrium

An outcome that occurs when all players in a game use an optimal strategy in response to all other players' strategies, such that no individual player can do better by changing their mind unilaterally.

Best-response Analysis

A method used to solve for Nash equilibrium where each player selects the best response to every possible move by the other player.

Dominant Strategy

Occurs when a player chooses the same action no matter what other players choose.

Focal Points

Clues that lead to a greater probability of success by helping players coordinate independently in games with multiple Nash equilibria.

Prisoner’s Dilemma

A situation in noncooperative games where the Nash equilibrium outcome is inferior to another outcome that could be achieved with cooperation.

Trigger Strategies

Actions in repeated games that are contingent on the other player’s past decisions.

Grim Trigger

A type of trigger strategy where retaliation for a rival's move is permanent.

Trembling Hand Trigger

A trigger strategy that allows for a mistake by an opponent before one retaliates.

Tit-for-tat

A trigger strategy where cooperation is rewarded and defection is punished based on the opponent's previous move.

Leadership Games

Competitive games in which one player is dominant, such as competition between large and small airline carriers.

Chicken Games

Competitive games in which players hold out for the optimal outcome, but if neither side gives in, the worst outcome occurs.