Study of behavior in strategic situations

Oligopoly with only two members

Firms agreement in a market about quantities to produce or prices to charge

Group of firms acting in unison

If Oligopolists Form a Cartel:

Maximize total profit, Produce monopoly quantity, Charge monopoly price

Equilibrium for an Oligopoly:

Since oligopolists can’t successfully collude, self-interest drives output up, prices down, and profits below monopoly levels

Situation where economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen

Individual Oligopoly Outcome:

Oligopolies produce between monopoly and competitive output, with prices in between as well

Size of an Oligopoly + Market Outcome:

As the number of sellers in an oligopoly grows, an oligopolistic market increasingly resembles a competitive market

Output Effect (Size of an Oligopoly + Market Outcome):

Because price exceeds marginal cost, selling one more product at the going price increases profit

Price Effect (Size of an Oligopoly + Market Outcome):

Because raising production increases the total quantity sold, price declines, as does profit on all other quantities sold

Prisoners’ Dilemma:

Particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it’s mutually beneficial

Strategy that’s best for a player in a game regardless of the other players’ strategies

Oligopolies as a Prisoners’ Dilemma:

Oligopolies struggle to keep monopoly-level profits because each firm has an incentive to cheat on cooperation

Dominant Strategy- Each company drills two wells, lower profit

Why People Sometimes Cooperate:

Cartels can sometimes sustain cooperation in repeated interactions, even though members have incentives to defect

Sherman Antitrust Act (1890):

Elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy

Further strengthen antitrust laws; used to prevent mergers and oligopolists from colluding

Controversies Over Antitrust Policy:

Used to condemn some business practices whose effects aren’t obvious

Resale Price Maintenance:

Require retailers to charge customers a given price, Seemingly anticompetitive, Prevents retailers from competing on price

Charger prices that aren’t too low, Anticompetitive, Price cuts sometimes necessary to drive firms out of the market

Offer two goods together at a single price Expand market power

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ECON EXAM 3 (C18)

Question	Answer
Game Theory:	Study of behavior in strategic situations
Duopoly:	Oligopoly with only two members
Collusion:	Firms agreement in a market about quantities to produce or prices to charge
Cartel:	Group of firms acting in unison
If Oligopolists Form a Cartel:	Maximize total profit, Produce monopoly quantity, Charge monopoly price
Equilibrium for an Oligopoly:	Since oligopolists can’t successfully collude, self-interest drives output up, prices down, and profits below monopoly levels
Nash Equilibrium:	Situation where economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen
Individual Oligopoly Outcome:	Oligopolies produce between monopoly and competitive output, with prices in between as well
Size of an Oligopoly + Market Outcome:	As the number of sellers in an oligopoly grows, an oligopolistic market increasingly resembles a competitive market
Output Effect (Size of an Oligopoly + Market Outcome):	Because price exceeds marginal cost, selling one more product at the going price increases profit
Price Effect (Size of an Oligopoly + Market Outcome):	Because raising production increases the total quantity sold, price declines, as does profit on all other quantities sold
Prisoners’ Dilemma:	Particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it’s mutually beneficial
Dominant Strategy:	Strategy that’s best for a player in a game regardless of the other players’ strategies
Oligopolies as a Prisoners’ Dilemma:	Oligopolies struggle to keep monopoly-level profits because each firm has an incentive to cheat on cooperation
Arms Races:	Dominant Strategy- Arm
Common Resources:	Dominant Strategy- Each company drills two wells, lower profit
Why People Sometimes Cooperate:	Cartels can sometimes sustain cooperation in repeated interactions, even though members have incentives to defect
Sherman Antitrust Act (1890):	Elevated agreements among oligopolists from an unenforceable contract to a criminal conspiracy
Clayton Act (1914):	Further strengthen antitrust laws; used to prevent mergers and oligopolists from colluding
Controversies Over Antitrust Policy:	Used to condemn some business practices whose effects aren’t obvious
Resale Price Maintenance:	Require retailers to charge customers a given price, Seemingly anticompetitive, Prevents retailers from competing on price
Predatory Pricing:	Charger prices that aren’t too low, Anticompetitive, Price cuts sometimes necessary to drive firms out of the market
Bundling:	Offer two goods together at a single price Expand market power

Created by: IanMcCormick20

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