Micro: Chapter 14: Oligopoly

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Def. oligopoly

a market with a few large firms

What are some examples of oligopolies?

cars, phones, breakfast cereals (kellogs, general mills)

Assumptions of oligopolies:

few large firms, barriers to entry and exit (takes a lot of capital to make vehicles) , interdependent decision making, firms engage in strategic behavior (game theory) , can have identical or differentiated products

Def. interdependent decision making

mutual inter-dependence, decisions of one firm affects decisions of other firms.

Examples of differentiated oligopolies?

cars

Example of identical oligopoly

oil or crude oil

Def. Industry concentration

how competitive or concentrated the market is

What are the 2 ways to measure competiveness of a market

concentration ratio and HHI

Def. concentration ratio

percentage of market share (the top 4 or 8 usually) firms have in the market

Ex. 2 firms in the market have 50% MKT share =

100%

Ex. top 4 firms in shampoo market: ,10%,8%,12%, 10% =

40%

Def. HHI Index:

market share percentage , squared

ex. in one market there's 100 firms. each are 1% market share =

HHI is 100. the competition is fine

The Justice Department says you cannot merge if it is above ____.

1800

Def. Collusive oligopoly

cartel and price leaders

Def. cartel

a FORMAL collusive agreement to keep price high to make more profit.

In the U.S., cartels are ______.

illegal

Def. collusion

firms working together to earn higher joint profit. act like a monopoly

What is the problem with cartels?

they have a high incentive to cheat

Def. price leadership

implicit (informal) collusion. (dominant firm sets a price and smaller firms follow along. ex. walmart, target, k-mart etc.

Def. kinked demand curve

a model that predicts rival firms will reach equilibrium with very stable prices based on concerns that any attempt to change price will reduce profits; price gets sticky

Def. game theory:

a model that attempts to explain a firm's best strategy assuming the firm anticipating how rival firms react

Who is John Nash?

did a lot of game theories. came up with the Nash equilibrium

Def. Nash equilibrium

the combination that will result from analyzing a payoff matrix

Ex. of Nash Equilibrium

prisoner's dilemma

Def. Contestable Market Theory

model based on a firm that chooses a relatively low product price -> profit is relatively low; in order to NOT attract new firms

The characteristic that distinguishes oligopoly from the other market model is:

interdependence among firms in pricing and output decisions

What are examples of oligopolies :

cereal, cars, and cell phones

Once a cartel has successfully achieved a price and output level similar to what would prevail in a monopolized market, some members have an incentive to cheat by:

increasing production, which causes the market price to fall

Game theory assumes that:

firms anticipate rival firm's decisions when they make their own decisions.

The Kinked Demand model is based on the notion that an oligopoly firm assumes rival firms will:

ignore price increases but match price decreases

Game theory helps explain:

the strategic behavior of firms in oligopoly markets

Industry profit is likely to be lowest in an industry that:

is a contestable market

The Organization of Petroleum Exporting Countries (OPEC) is an ex. of?

cartel

An individual firm in an oligopolistic industry in the U.S. generally:

can earn positive economic profit in the LR due to the existence of barriers to entry like economies of scale

Firms in oligopolistic markets consider the:

reaction of other firms in the market when making a pricing and output decision

If firms in an oliopoly market are able to collude, then:

the market price is likely to be higher and the output is likely to be lower than they would be if firms could not collude

An arrangement where there is explicit collusion between competitors to set a common price and adhere to output quotas is referred to as:

a cartel

The sucess of cartels has been limited by:

incentives by members to cheat on the collusive agreement

Suppose Bobby's bait company is an oligopolistic producer of fishing lures. He produces at the profit maximizing level of output and the PRICE is below ATC, but above AVC

incurring a short run economic loss, but is minimizing its losses by producing in the short run

To be sucessful in increasing prices for their product, members of a cartel must:

agree to limit their output

Behavior in which a dominant firm's pricing strategy is followed by other firms in the market industry is called:

price leadership

Assume all firms in an oligopolistic industry are colluding to set price and output to maximize total industry profit. If the firms are forced to stop colluding, the price of their product will most likely

decrease but output will increase

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