Ch. 17 AP Microeconomics (Oligopoly)

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Game Theory
Game Theory
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The study of how people behave in strategic situations(involving the anticipation of actions taken by others and yourself).
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Oligopoly
Oligopoly
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A market structure with only a handful of competitors selling products that are either similar or different. Barriers to entry are typically high. For example the market for Tennis Balls. More interdependence in these markets.
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Prisoners dilemma
Prisoners dilemma
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A particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial to do so. Useful when analyzing oligopoly
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self interest
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A key feature of oligopoly is between tension and _____ _________.
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Duopoly
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Two firms compete vigorously with the other for customers using non-price competition. There are very strong barriers to entry
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Collusion
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An agreement among firms in a market about quantities to produce or prices to charge, happens in an oligopoly, and forms a cartel.
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Cartel
Cartel
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A group of firms acting in unison (In collusion), a hallmark of oligopoly.
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Antitrust laws
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What limits oligopoly’s in the U.S from explicitly colluding and forming a cartel.
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Nash Equilibrium
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A situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen
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John Nash
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Prominent theoretical mathematician who suffered from schizophrenia; awarded Nobel Prize for his game theory that is used by economists today. Life was portrayed in the book and movie “A Beautiful Mind”
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oligopoly
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When firms in an ________ choose production to maximize profit, they produce a quantity of output greater than the level produced by monopoly and less than the quantity produced by competition.
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Collusion
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_________ among members of an oligopoly generally decrease when more members are added..
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Output effect
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Because price is above marginal cost, selling one more unit at the going price will raise profit
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Price effect
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Raising production increases market quantity, which reduces market price and reduces profit on all units sold.
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output effect
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If the ________ ____ is larger than the price effect than firms will increase production , if not they will decrease production.
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Dominant Strategy
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A strategy that is best for a player in a game regardless of the strategies chosen by the other players
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OPEC
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Organization of Petroleum Exporting Countries; international cartel that inflates price of oil by limiting supply; Venezuela, Saudi Arabia and UAE are prominent members
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tit for tat
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A strategy for the repeated prisoner’s dilemma in which players cooperate on the first move, then mimic their partner’s last move on each successive move. The most successful strategy in game theory.
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Predatory Pricing
Predatory Pricing
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Selling below cost with the intention of punishing a competitor or gaining higher long-term profits by putting competitors out of business.
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Tying
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Practice of requiring a customer to purchase on good in order to purchase another, a controversial business practice.

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