ECON1101 Lecture Notes - Lecture 10: Simultaneous Game, Strategic Dominance, Oligopoly

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31 May 2018

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Oligopoly is a market structure that features a small number of firms.

Small number of firms --> strategic interactions:

The actions of one firm that direct effects on the other firms (vice versa) --> in

making its own decision, a firm tries to anticipate what the other firms are about to

do.

A dominant strategy represents a strategy that is preferred by a player irrespective

of the strategy selected by the other player.

A simultaneous game is a type of game in which players move simultaneously or,

alternatively they are unaware of the other players' actions.

Cartels represent private agreements aimed at increasing the profit of the cartel

members by reducing competition in the market. (by controlling prices or

preventing entry)

Cartels are illegal nearly everywhere (prohibited under competition law) --> cartel

members cannot write enforceable contracts to keep the other members in line

(prisoner's dilemma)

Coordination Games are a type of games that capture those situations where the

players benefit from coordinating their decisions.

Week 10 -Market Power Oligopoly

Monday, 14 May 2018

9:29 pm

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Document Summary

Oligopoly is a market structure that features a small number of firms. The actions of one firm that direct effects on the other firms (vice versa) --> in making its own decision, a firm tries to anticipate what the other firms are about to do. A dominant strategy represents a strategy that is preferred by a player irrespective of the strategy selected by the other player. A simultaneous game is a type of game in which players move simultaneously or, alternatively they are unaware of the other players" actions. Cartels represent private agreements aimed at increasing the profit of the cartel members by reducing competition in the market. (by controlling prices or preventing entry) Cartels are illegal nearly everywhere (prohibited under competition law) --> cartel members cannot write enforceable contracts to keep the other members in line (prisoner"s dilemma)

Related Questions

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

1. Which of the following statements about oligopolies is not correct?

a.		Oligopolistic firms always charge the monopoly price.
b.		Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c.		An oligopolistic market has only a few sellers.
d.		The actions of any one seller can have a large impact on the profits of all other sellers.

2. Which is true of an oligopoly market that reaches a Nash equilibrium?

a.		The firms will not have behaved as profit maximizers.
b.		A firm will have chosen its best strategy, given the strategies chosen by other firms in the market.
c.		A firm will not take into account the strategies of competing firms.
d.		The market price will be different for each firm.

3. In game theory, what is a dominant strategy?

a.		the best strategy for a player to follow, regardless of the what strategies other players use
b.		a strategy that makes every player better off
c.		a strategy that must appear in every game
d.		the best strategy for a player to follow only if other players are cooperative

4. Which of the following situations produces the largest profits for oligopolists?

a.		The firms reach a Nash equilibrium.
b.		The firms combine to produce the monopoly output level.
c.		The firms set prices equal to marginal cost.
d.		The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.

In a monopolistically competitive market, the rule for maximizing profit is to set MR=MC, which means

Price is higher than marginal revenue

Price is equal to marginal cost

Price is equal to marginal revenue

Price is lower than marginal revenue

Perfect competition displays________________________ because the social benefits of additional production, as measured by the price that people are willing to pay, are in balance with the _____________________to society of that production

Economic efficiency; marginal revenues

Allocative efficiency; marginal costs

Economic efficiency; total revenues

Allocative efficiency; total costs

How can parties who find themselves in a prisoners dilemma situation avoid the undesired outcome and cooperate with each other

Find effective ways to penalize firms who do not cooperate

Sign legally enforceable contracts setting out their mutual agreement to act like a monopoly

One oligopoly can physically beat up another oligopoly

By seeking alternatives to create pressure for members to keep output up and prices up

In the framework of an oligopoly, what strategy can work like a silent form of cooperation

Always match other cartel firmsï¿½ price cuts, but donï¿½t match price increases

Immediately match price increase

Legally enforcement agreements

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ECON1101 Lecture Notes - Lecture 10: Simultaneous Game, Strategic Dominance, Oligopoly

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