Glossary
Colluding Oligopolies (Cartels)
A type of oligopoly where firms cooperate, often secretly, to act as a single entity, typically by fixing prices or limiting output to maximize joint profits.
Example:
If major oil-producing nations secretly agree to limit their output to drive up global prices, they are forming a colluding oligopoly or cartel.
Differentiated Products
Products offered by firms that are similar but have distinct features, branding, or perceived qualities that set them apart in the eyes of consumers.
Example:
While all soft drinks quench thirst, Coca-Cola and Pepsi offer differentiated products through unique flavors, branding, and marketing campaigns.
Dominant Strategy
A strategy that yields the best outcome for a player in a game, regardless of what the other player chooses to do.
Example:
If a company finds that advertising always increases its profit, regardless of whether its rival advertises, then advertising is its dominant strategy.
Duopoly
A specific type of oligopoly where only two firms dominate the entire market for a particular product or service.
Example:
Historically, the market for commercial aircraft has largely been a duopoly dominated by Boeing and Airbus.
Game Theory
The study of how rational individuals or firms make strategic decisions in situations where the outcome for each participant depends on the actions of all participants.
Example:
Analyzing how two rival streaming services decide whether to invest in exclusive content or lower subscription prices involves applying game theory.
High Barriers to Entry
Significant obstacles that make it difficult or costly for new firms to enter a particular market, protecting existing firms from competition.
Example:
The massive capital investment required to build a new automobile manufacturing plant represents a high barrier to entry for potential competitors.
Kinked Demand Curve
A theoretical demand curve for an oligopoly firm that is more elastic for price increases (competitors ignore) and more inelastic for price decreases (competitors match).
Example:
An oligopolist might face a kinked demand curve if its rivals ignore price hikes but quickly match price cuts, making price changes less appealing.
Long-Run Profits
The ability of firms in certain market structures, like oligopolies, to sustain economic profits over an extended period due to factors such as high barriers to entry.
Example:
Despite intense competition, major tech companies like Google and Meta consistently report substantial long-run profits because of their dominant market positions and network effects.
Nash Equilibrium
A stable state in a game where no player can improve their outcome by unilaterally changing their strategy, assuming the other players' strategies remain unchanged.
Example:
In a pricing game, if both firms choose a low price and neither can increase their profit by raising their price alone, that low-price outcome is a Nash Equilibrium.
Non-Colluding Oligopolies
An oligopoly where firms compete against each other without explicit cooperation, often leading to strategic interactions like price leadership.
Example:
When fast-food chains like McDonald's and Burger King constantly adjust their menu prices in response to each other's promotions, they are operating as a non-colluding oligopoly.
Non-Price Competition
Strategic actions taken by firms to attract customers based on factors other than price, such as advertising, product quality, or customer service.
Example:
Airlines offering loyalty programs, in-flight entertainment, or premium seating are engaging in non-price competition to win over passengers.
Oligopoly
A market structure dominated by a few large firms that are interdependent in their decision-making.
Example:
The global smartphone market, where a few major players like Apple and Samsung hold significant market share, exemplifies an oligopoly.
Payoff Matrix
A table used in game theory to illustrate the possible outcomes (payoffs) for each player based on the combination of their chosen strategies.
Example:
A payoff matrix can show the profits a coffee shop earns based on whether it offers a discount and whether its competitor also offers one.
Price Leadership
A common practice in oligopolies where one dominant firm initiates a price change, and other firms in the industry tend to follow suit.
Example:
When a major airline announces a fare increase, and other airlines quickly match it, this demonstrates price leadership.
Price Makers
Firms that possess market power and can influence the market price of their product rather than simply accepting the prevailing market price.
Example:
A pharmaceutical company holding a patent on a life-saving drug is a price maker, as it can set the price without direct competition.