ECON 200 Chapter 17

What is a monopsony?

A market with only one buyer of a good or service.

What is a common example of a monopsony?

A single employer in a small town hiring workers.

What is oligopoly?

A market dominated by a small number of firms.

What is imperfect competition?

When firms compete but have market power to affect prices.

What are the two forms of imperfect competition?

Oligopoly and monopolistic competition.

Why are oligopolies prevalent?

Due to increasing returns to scale, though weaker than in monopoly.

What is the Herfindahl–Hirschman Index (HHI)?

The sum of the squares of each firm’s market share.

What does an Herfindahl–Hirschman Index below 1,000 indicate?

A strongly competitive market.

What does an Herfindahl–Hirschman Index between 1,000 and 1,800 indicate?

A somewhat competitive market.

What does an above Herfindahl–Hirschman Index 1,800 indicate?

An oligopoly.

What is interdependence in oligopoly?

Decisions of one firm affect the profits of rivals

What is a duopoly?

An oligopoly with only two firms.

What is collusion?

Cooperation among firms to raise joint profits.

What is a cartel?

An agreement among producers to restrict output and increase profits.

What is the most famous cartel?

Organization of the Petroleum Exporting Countries

What is noncooperative behavior?

Firms act in self-interest, ignoring effects on others' profits.

What is game theory?

Study of behavior in situations of interdependence.

What is a payoff in game theory?

The reward (e.g., profit) received by a player.

What is a payoff matrix?

Shows how each player's payoff depends on the actions of both.

What is the prisoners' dilemma?

A situation where each player has an incentive to cheat, making both worse off.

What is a dominant strategy?

A player's best action regardless of the other player's action.

What is a Nash equilibrium?

When each player maximizes payoff given the other's actions, ignoring effects on others.

In the prisoners' dilemma for firms, what is the typical outcome?

Both firms cheat, leading to a worse outcome than cooperation.

What is antitrust policy?

Government policy aimed at preventing collusion among firms.

What real-world example relates to the prisoners' dilemma?

The U.S.–Soviet arms race during the Cold War.