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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.
Def. concentration ratio
percentage of market share (the top 4 or 8 usually) firms have in the market
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
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
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
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:
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:
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