Oligopoly

ECON 1030 Unit 11

Oligopoly

A market structure characterized by a few large producers, of either standardized or differentiated products, operating in industries with extensive entry barriers. These producers are price makers and behave strategically when making decisions related to the features, prices, and advertising of their products.

Product Differentiation

The strategy of distinguishing one firm’s product from the competing products of other firms.

Mutual Interdependence

A situation in which a change in the strategy followed by one producer will likely affect the sales, profits, and behavior of another producer.

Four-Firm Concentration Ratio (CR4)

A concentration ratio that measures the percentage of sales by the four largest firms in a particular industry.

Herfindahl-Hirschman Index (HHI)

A concentration index that measures the sum of the squared percentage of sales from all firms in a particular industry

Market Share

The percentage of total market sales accruing to one specific firm

Monopoly

A market structure characterized by a single seller, producing a good or service for which there are no close substitutes, in a market with relatively blocked entry. A monopoly is a price maker.

Cartel

A group of competing companies that aim to maximize joint profits by coordinating their policies to fix prices, manipulate output, or restrict competition.

Collusion

A situation in which decision makers coordinate their actions to achieve a desired outcome. Collusion is generally used to achieve an outcome that would not be possible in the absence of coordinated actions, and it is typically associated with illegal or anticompetitive behaviors

Limit Pricing

The practice used by the dominant firm in a noncollusive oligopolistic market to prevent the entry of new firms by establishing a price lower than the shortrun profit-maximizing price.

Price Leadership

A practice used by the dominant firm in a noncollusive oligopolistic market to signal price changes.

Game Theory

The study of the strategic behavior of decision makers.

Payoff Matrix

A table showing the potential outcomes arising from the choices made by decision makers.

Dominant Strategy

A situation in which a particular strategy yields the highest payoff for a decision maker regardless of the other decision makers’ strategy

Nash Equilibrium

An outcome in which decision makers choose their dominant strategy and each has no incentive to independently change his or her strategy.

Repeated Game

A situation in which a game is played a (potentially infinite) number of times, with the players choosing a strategy each time.

Backward Induction

The process of identifying optimal strategies by starting at the end of a game tree and moving toward its origin.

First-Mover Advantage

The advantage that a player receives by moving first in a sequential game, and thereby influencing the set of possible outcomes.

Game Tree

A mapping tool that shows the strategies available to players engaged in a sequential game as well as the potential outcomes received by those players.