Oligopoly and Game Theory Practice Flashcards

These flashcards cover key vocabulary from the lecture on Oligopoly and Game Theory, including market structures, strategic behaviors, and equilibrium concepts.

Oligopoly

A market structure where competition is between a few dominant sellers, characterized by high barriers to entry, offering identical or differentiated products, and a high degree of interdependence between firms.

Duopoly

The simplest type of oligopoly, consisting of 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 (like oligopolies) choose their best strategy given the strategies that the others have chosen.

Output effect

A situation where price is above $MC$, meaning selling one more unit at the going price will raise profit.

Price effect

A situation where raising production increases the total amount sold, which lowers the price and lowers the profit on all units sold.

Game theory

The study of how people behave in strategic situations.

Game

An interaction between players with rules in which the players use strategies and receive payoffs.

Payoffs

The players’ valuation of the outcome of the game, such as profits for firms or utilities for individuals.

Rules of the game

Determinations of the timing of players’ moves and the actions players can make at each move.

Action

A move that a player makes at a specified stage of a game.

Strategy

A battle plan specifying the action a player will make based on information available at each move and for any possible contingency.

Strategic interdependence

Occurs when a player’s optimal strategy depends on the actions of others.

Dominant strategy

A strategy that is the best choice for a player, regardless of what the other players choose.

Complete information

A condition where the payoff function is common knowledge among all players in a game.

Perfect information

A condition where a player knows the full history of the game up to the point they are about to move.

Static games

Games in which each player acts simultaneously and only once.

Dynamic games

Games in which players move either repeatedly or sequentially.

Prisoners’ dilemma

A game between two captured suspected criminals that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

Best Response

A strategy that maximizes a player’s payoff given its beliefs about its rivals’ strategies.

Repeated games

A type of dynamic game in which a single-period, simultaneous-moves game is played at least twice and possibly many times.

Sequential games

A type of dynamic game in which sequential moves occur in a single period, often analyzed in an extensive form such as a game tree.

Extensive form

A method of analyzing sequential games (using a game tree) that specifies players, sequence of moves, possible actions, available information, and payoff functions.

Backward induction

A process of determining the Nash Equilibrium by first finding the best response of the last player to move and repeating the process back to the beginning.

Implicit collusion

A form of collusion where firms do not meet to discuss prices.

Explicit collusion

Also known as a cartel, this is an agreement among competitors that relies on interfirm communication.

Tacit collusion

When oligopolists try not to engage in price cutting or excessive advertising by watching the behavior and responses of other firms without written agreements.

Price leadership

One of the unwritten rules of tacit collusion where one firm sets a price that others then follow.

Competition and Markets Authority (CMA)

The primary regulatory body in the UK responsible for enforcing competition law.