All Flashcards
How does game theory apply to pricing decisions in an oligopoly?
Firms use payoff matrices to analyze the potential outcomes of different pricing strategies, considering the likely responses of their competitors.
How do high barriers to entry affect long-run profits in an oligopoly?
High barriers prevent new firms from entering, allowing existing firms to maintain market power and earn economic profits in the long run.
How does non-price competition manifest in the cereal industry?
Firms compete through advertising, product differentiation (e.g., different flavors, added ingredients), and loyalty programs to attract customers.
How does the concept of interdependence affect decision-making in the automobile industry?
Each firm must consider how its pricing, production, and marketing decisions will affect its rivals and how those rivals will likely respond.
How does collusion impact consumer surplus in an oligopoly?
Collusion leads to higher prices and lower output, reducing consumer surplus and transferring wealth to the oligopolistic firms.
How does the absence of a dominant strategy affect firm behavior in an oligopoly?
Firms must carefully analyze their rivals' potential actions and choose strategies that maximize their own payoffs given the uncertainty.
How can advertising create barriers to entry in an oligopoly?
Established firms can build strong brand loyalty through extensive advertising, making it difficult for new entrants to attract customers.
How does product differentiation lead to market power in an oligopoly?
By offering products with unique features or perceived benefits, firms can create brand loyalty and charge prices above marginal cost.
In the Coca-Cola and Pepsi game theory example, what is the outcome if both firms act in their own self-interest without colluding?
Both firms will charge a lower price, resulting in a profit of $1000 each.
How does the presence of a Nash Equilibrium indicate stability in an oligopoly market?
It signifies that no firm has an incentive to unilaterally change its strategy, given the strategies of the other firms, leading to a predictable market outcome.
What is the impact of antitrust laws on colluding oligopolies?
Antitrust laws aim to prevent collusion and promote competition, leading to lower prices and increased output.
How does government regulation affect pricing strategies in oligopolies?
Regulation can limit the ability of firms to set prices above competitive levels, protecting consumers from exploitation.
What is the effect of deregulation on competition in oligopolistic industries?
Deregulation can increase competition by allowing new firms to enter the market, but it can also lead to consolidation and increased market power for existing firms.
How does the enforcement of intellectual property rights affect innovation in oligopolies?
Strong intellectual property rights can incentivize firms to invest in research and development, leading to new products and technologies.
What is the impact of subsidies on the output levels of firms in an oligopoly?
Subsidies can encourage firms to increase production, potentially leading to lower prices and increased consumer welfare, but also potential inefficiencies.
How do import tariffs affect domestic oligopolies?
Tariffs can protect domestic firms from foreign competition, allowing them to maintain higher prices and market share, but also reducing consumer choice.
What is the effect of price ceilings on the supply of goods in an oligopoly?
Price ceilings can lead to shortages if set below the equilibrium price, as firms may reduce production due to lower profitability.
How can government intervention address inefficiencies in unregulated oligopolies?
Intervention can promote competition, prevent collusion, and ensure that prices reflect marginal costs, leading to greater economic efficiency.
What is the definition of an oligopoly?
A market structure dominated by a few large firms with high barriers to entry.
What is a colluding oligopoly (cartel)?
Firms communicate and act as a single entity to control prices and output.
What is a non-colluding oligopoly?
Firms compete and do not cooperate, often practicing price leadership.
What is game theory?
The study of how people behave in strategic situations.
What is a 'game' in game theory?
Any situation where the outcome depends on the actions of two or more decision-makers.
What is a payoff matrix?
A table that shows the actions of two firms and the payoffs (usually profit) for each combination of choices.
What is a dominant strategy?
The best strategy for a firm, regardless of what the other firm does.
What is Nash Equilibrium?
A stable state where no player can unilaterally improve their position.
What is price leadership?
When the dominant firm initiates a price change, and other firms either follow or ignore.
What is a kinked demand curve?
A demand curve that is more elastic for price increases and more inelastic for price decreases.