Oligopoly Notes

Oligopoly

A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.

Homogenous oligopoly

An oligopoly in which firms produce a standardized product.

Differentiated oligopoly

An oligopoly in which firms produce a differentiated product.

Strategic behavior

Self-interested economic actions that take into account the expected reactions of others.

Mutual interdependence

A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect its rivals to react to the change.

Interindustry competition

The competition for sales between the products of one industry and the products of another industry.

Import competition

The competition that domestic firms encounter from the products and services of foreign producers.

Game theory

The study of how people behave in strategic situations in which individuals must take into account not only their own possible actions but also the possible reactions of others. Originally developed to analyze the best ways to play games like poker and chess.

Prisoner’s dilemma

A famous game analyzed in game theory in which two players who could have reached a mutually beneficial outcome through cooperation will instead end up at a mutually inferior outcome as they pursue their own respective interests (instead of cooperating). Helps to explain why collusion can be difficult for oligopoly firms to achieve or maintain.

Collusion

Cooperation or conspiracy in which firms act together (collude) to fix prices, divide a market, or otherwise restrict competition. Most collusion is illegal.

One-time game

A strategic interaction (game) between two or more parties (players) that all parties know will take place only once.

Simultaneous game

A strategic interaction (game) between two or more parties (players) in which every player moves (makes a decision) at the same time.

Positive-sum game

A strategic interaction (game) between two or more parties (players) in which the winners’ gains exceed the losers’ losses so that the gains and losses sum to something positive.

Zero-sum game

A strategic interaction (game) between two or more parties (players) in which the winners’ gains exactly offset the losers’ losses so that the gains and losses sum to zero.

Negative-sum game

A strategic interaction (game) between two or more parties (players) in which the winners’ gains are less than the losers’ losses so that the gains and losses sum to a negative number.

Dominant strategy

In a strategic interaction (game) between two or more players, a course of action (strategy) that a player will wish to undertake no matter what the other players choose to do.

Nash equilibrium

The situation that occurs in some simultaneous games wherein every player is playing his or her dominant strategy at the same time and thus no player has any reason to change behavior.

Credible threat

In a sequential game with two players, a statement made by Player 1 that truthfully (credibly) threatens a penalizing action against Player 2 if Player 2 does something that Player 1 does not want Player 2 to do. Opposite of empty threat.

Repeated game

A strategic interaction (game) between two or more parties (players) that all parties know will take place repeatedly.

Sequential game

A strategic interaction (game) between two or more parties (players) in which each party moves (makes a decision) in a predetermined order (sequence).

First-mover advantage

In game theory, the benefit obtained by the party that moves first in a sequential game. A situation that occurs in a sequential game if the player who gets to move first has an advantage in terms of final outcomes over the player(s) who move subsequently.