7 - OLIGOPOLY

• what is a concentration ratio?

  the percentage of the market’s total output supplied by its four largest firms
• what is an oligopoly?

  a market structure in which only a few sellers offer similar or identical products
• what is game theory?

  the study of how people behave in strategic situations
• what is collusion?


  an agreement among firms in a market about quantities to produce or prices to charge
• what is a cartel?

  a group of firms acting in unison, e.g., AT&T and Verizon in the outcome with collusion
• what is nash equlibirum?


  a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen
• When firms in an oligopoly individually choose their production quantity to maximize profit,

  ▪ oligopoly Q is greater than monopoly Q but smaller than competitive Q.

  ▪ oligopoly P is greater than competitive P but less than monopoly P.
• ▪ As the number of firms in the market increases,

  ▪ the price effect becomes smaller

  ▪ the oligopoly looks more and more like a competitive market

  ▪ P approaches MC

  ▪ the market quantity approaches the socially efficient quantity
• what is the dominant strategy in game theory?

  a strategy that is best for a player in a game regardless of the

  strategies chosen by the other players
• what is the prisoner's dilemma 


  a “game” between two captured criminals that illustrates

  why cooperation can be difficult even when it is mutually beneficial
• what are two strategies that may lead to cooperation?

  ▪ If your rival reneges in one round, you renege in all subsequent rounds.

  ▪ “Tit-for-tat” Whatever your rival does in one round

  (whether renege or cooperate), you do in the following round.
• what is the role for policy makers regarding oligopolies?

  Promote competition, prevent cooperation to move the oligopoly outcome closer to the efficient outcome.