Oligopoly, Game Theory, Static Games, Dynamic Games, Collusion

Flashcards covering key concepts in oligopoly, game theory, static games, dynamic games, and collusion.

Oligopoly

Market structure where competition occurs between a few dominant firms.

Characteristics of Oligopoly

High barriers to entry, identical or differentiated products, interdependence between firms.

Key feature of oligopoly

The tension between cooperation and self-interest.

Duopoly

An oligopoly with two members.

Collusion

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 oligopolies choose their best strategy, given the strategies that others have chosen.

Oligopoly Price

Price is less than monopoly price but greater than competitive price.

Output Effect

Price is above marginal cost, so selling one more at the going price will raise profit.

Price Effect

Raising production will increase the total amount sold, which will lower the price and lower the profit on all that is sold.

Game Theory

The study of how people behave in strategic situations.

Game (in Game Theory)

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

Static Games

Players act once and simultaneously.

Dynamic Games

Players move either repeatedly or sequentially.

Payoffs

Players’ valuation of the outcome of the game.

Rules of the Game

Determine 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 that specifies the action that a player will make based on the 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

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

Complete Information

Each player’s payoff depends on actions taken by all players, and the payoff function is common knowledge among all players.

Perfect Information

Player knows full history of the game up to the point he is about to move.

Static Game (definition)

Each player acts simultaneously, only once and has complete information about the payoff functions but imperfect information about rivals’ moves.

Prisoner's Dilemma

A ‘game’ between two captured prisoners 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.

Nash Equilibrium (definition)

A set of strategies is a Nash Equilibrium if, when all other players use these strategies, no player can obtain a higher payoff by choosing a different strategy.

Dynamic Games (definition)

Players move either sequentially or repeatedly, players have complete information about payoff functions at each move, players have perfect information about previous moves of all players.

Repeated Games

Single-period, simultaneous-moves game is played at least twice and possibly many times.

Sequential Games

Sequential moves occur in a 'single period.'

Collusion (definition)

Agreement between two or more firms to limit open competition.

Implicit Collusion

The firms do not meet to discuss prices.

Explicit Collusion ('Cartel')

Agreement among competitors that relies on interfirm communication.

Tacit Collusion

Oligopolists try not to engage in price cutting, excessive advertising or other forms of competition.

Backward Induction

Determine the best response by the last player to move, the best response for the player who made the next-to-last move , repeat process until beginning of the game.