Oligopolies and Game Theory Study Guide

These flashcards cover key definitions and concepts related to oligopolies and game theory, designed to assist students in studying for their exam.

Oligopoly

A market situation in which a few sellers dominate and each seller is aware of how others will react to their decisions.

Strategic interaction

The way in which firms in an oligopoly must consider the potential reactions of their competitors when making decisions.

Market power

The ability of a firm to control prices and output, as seen in oligopolies.

Barriers to entry

Factors that prevent new firms from entering the market; includes government regulations and economies of scale.

Homogeneous goods

Products that are identical or very similar, such as crude oil.

Differentiated goods

Products that differ from one another, allowing firms to gain market power, like branded soft drinks.

Vertical merger

A merger between firms at different stages of production.

Horizontal merger

A merger between firms in the same market to increase market concentration.

Strategic dependence

When one firm's actions significantly affect the sales and profits of other firms in the industry.

Deadweight loss

Economic inefficiency that occurs when market power allows firms to raise prices above marginal cost.

Game theory

A framework for analyzing situations where players make interdependent decisions.

Players

The decision-makers involved in a game, such as firms or individuals.

Strategies

The complete set of actions available to a player in a game.

Payoffs

The outcomes associated with various strategy combinations in a game.

Cooperative game

A game where players can coordinate strategies and make binding agreements.

Noncooperative game

A game where players cannot make binding agreements; each acts independently.

Simultaneous game

A game where players make decisions at the same time without knowing others' choices.

Sequential game

A game where players make decisions in sequence, with later players observing earlier moves.

Zero-sum game

A situation where one player's gain is equivalent to another's loss, keeping total payoffs constant.

Dominant strategy

A strategy that yields the highest payoff for a player, regardless of what others do.

Opportunistic behavior

Short-sighted action focusing on immediate gains while ignoring long-term cooperation benefits.

Tit-for-tat

A strategy in repeated games where a player mimics the previous action of the opponent.

Price leadership

A pricing strategy where the dominant firm sets the price first, followed by other firms.

Price war

A competitive struggle where firms repeatedly cut prices to outdo each other.

Prisoner’s Dilemma

A situation where two individuals acting in their own self-interest leads to a negative outcome for both.

Nash equilibrium

The point in a game where no player can benefit by changing their strategy if others keep theirs unchanged.

Pareto optimality

A situation where it is impossible to make one player better off without making another worse off.

Extensive form game

A representation of a game that specifies the order of moves and the decisions at each node.