Economics Chapter 15

oligopoly and strategic behavior

Oligopoly -- a market served by a few firms
game theory -- a framework to explore the actions and reactions of interdependent decision-makers
concentration ratio -- a measure of the degree of concentration in a market; the four firm concentration ratio is the percentage of the market output produced by the four largest firms
duopoly -- a market with two firms
cartel -- a group of firms that collude explicity, coordinating their pricing decisions
price-fixing -- under arrangement in which two firms coordinate their pricing decisions
game tree -- a geographical representation of the consequences of different strategies
dominant strategy -- an action that is the best choice for a player, no matter what the opponent does
duopolosts' dilemma -- a situation in which both firms in a market would be better off if both shows the high price but each chooses the low-price
simultaneous decision-making game -- a game in which each player makes a choice without the other person knowing what that choice is
sequential decision making game -- a game in which one player makes the choice before the other
guaranteed price matching strategy -- a strategy where a firm guarantees it will match a lower price by a competitor; also known as the meet the competition policy
grim-trigger strategy -- a strategy where a firm response to underpricing by choosing a price so low that each firm makes zero economic profit
tit-for-tat -- a strategy where one firm chooses whatever price the other for chose in the proceeding.
Price leadership -- implicit agreement under which firms and a market chose a price leader, observed that firms price, and match it
kinked demand curve model -- a model under which firms and an oligopoly match price reductions by other firms but do not match price increases by other firms
limit pricing -- a scheme under which a monopolist accepts a price below the normal monopoly price to detour other firms from entering the market
contestable market -- a market in which the costs of entering and leaving are low, so firms that are already in the market are constantly threatened by the entry of new firms
Nash equilibrium -- an outcome of a game in which each player is doing the best here she can, given the action of the other players

Notes

Firms may use cartel pricing or price-fixing to avoid competition and keep prices high. If another firm threatens to enter a monopolist's market, the monopolist may cut its price to discourage other firms from entering a market.

Each firm in an oligopoly pass under incentive to underpriced the other firms, so price-fixing (also known as cartel pricing) will be on successful unless firms have some way of enforcing a fixed pricing agreement.

One way to maintain price-fixing is a guaranteed price matching scheme: one firm chooses the high price and promises to match a lower price offered by its competitor.

Price-fixing is more likely to occur if firms choose prices repeatedly and can punish a firm that chooses a price below the cartel price.

To prevent a second firm from entering the market, an insecure monopolist may commit itself to producing a relatively large quantity and excepting a relatively low price.