Econ 201: Chapter 17

Flashcard maker : Darryl Wooten
Oligopoly
a market structure in which only a few sellers offer similar or identical products
Duopoly
an oligopoly with only two firms
Game Theory
the study of how people behave in strategic situations
Collusion
an argument among firms in a market about quantities to produce or prices to charge
Cartel
a group of firms acting in unison
Nash Equilibrium
a situation in which economies actors interact with one another each choose their best strategy given the strategies that all the other actor have chosen. OR
a solution concept of a non-cooperative game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy
Prisoners’ Dilemma
a particular \”game\” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Dominant Strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
If a group of sellers could form a cartel, what quantity and price would they try to set?
they would choose to produce the monopoly quantity, acting in collusion as if they were a monopoly
Compare the quantity and price of an oligopoly to those of a monopoly.
the oligopoly will produce quantities larger than those produced in a monopoly, but the price will be less than that of the monopoly.
Compare the price and quantity of an oligopoly to those of a competitive market.
the oligopoly will produce less than those produced in a competitive market, but will the price will be greater than that of a competitive market.
How does the number of firms in an oligopoly affect the outcome of its market?
The greater number of sellers in an oligopoly with, the smaller the price effect because each individual firm’s impact on the price is small. Thus the output increases
What does prisoners’ dilemma have to do with oligopoly?
Two oligopolists are better off if they cooperate by keeping production low and sharing the monopoly profits.
Give two examples other than oligopoly that show how the prisoners’ dilemma helps to explain behavior.
The arms race and common resources are some examples of how the prisoners’ dilemma helps to explain behavior. In the arms race during the Cold War, the United States and the Soviet Union could not agree on arms reductions because each was fearful that after cooperating for a while, the other country would cheat. When two companies share a common resource, they would be better off sharing it. But, fearful that the other company will use more of the common resource, each company ends up overusing it
What kinds of behavior do the antitrust laws prohibit?
prohibit firms from trying to monopolize a market. They are used to prevent mergers that would lead to excessive market power in any firm and to keep oligopolists from acting together in ways that would make the market less competitive
When does resale price maintenance occur?
Resale price maintenance occurs when a wholesaler sets a minimum price that retailers can charge
Why would an oligopoly fail to cooperate?
self interest makes it difficult to agree on how to divide the profits or because antitrust laws prohibit collusion
What does unrestricted international trade do to oligopolies?
it increases the number of firms in domestic oligopolies and moves the outcome of the market closer to the competitive solution where prices are equal to marginal cost
What is the Sherman Antitrust Act of 1890? What is the Clayton Act of 1914?
the first act that makes agreements not to compete (to reduce quantities or raise prices) a criminal conspiracy, the second act allows individuals harmed by such agreements the right to sue for triple damages. Price fixing clearly reduces economies welfare and is illegal
What is resale price maintenance?
When manufacturers require retailers to charge a certain price
Why is resale price maintenance beneficial?
1) if the manufacturer has market power, it is at wholesale not retail, and the manufacturer would not gain from eliminating competition t the ratio level, and 2) resale maintenance stops discount retailers from free riding on the services provided by full-service retailers
What is predatory pricing? and when does it occur?
occurs when a firm cuts prices with the intention of driving competitors out of the market so that the firm can become a monopolist and later raise prices.
Why is this behavior unlikely?
because it hurts the firm the is engaged in predatory pricing the most
What is tying? and when does it occur?
occurs when a manufacture bundles two products together and sells them for one price.
What is the argument about tying?
courts argue that it gives the firm more market power by connecting a weak product with a strong product. some economist suggest that it allows the firm to price discriminate, which may actually increase efficiency.

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