ECON 001 Lecture Notes - Lecture 14: Tacit Collusion, Oligopoly, Microeconomics

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Chapter 17 Oligopolies

Oligopoly- industry type that’s dominated by a few large firms each of which are large

enough to influence market price.

Key Point: Because there are few large firms, actions of any one of these firms will have large

effect on other firms. Firms in oligopoly must think strategically

II. Collusion Model

Q: How does firm in oligarchy determine output and prices?

Collusion model- firms in oligopoly can get together and make joint decisions about price

and output.

●Resulting output under collusion model is monopoly outcome

Cartel- group of firms that get together and make price and output decisions

Collusion- occurs when price and quantity fixing agreements are explicitly determined

●In U.S collusion is illegal

●Tacit collusion in US is legal

Tacit Collusion- occurs when one firm changes prices and other firms follow, no formal

agreement is made.

In order for a cartel to be successful it must satisfy 2 conditions:

●Demand for product must be inelastic. Few substitutes. If good has inelastic demand,

cartel can cut production and raise prices and consumers will still buy good.

●Members of cartel cannot cheat. Strong incentive to cheat. If everyone cheats, entire

cartel will collapse.

III. Game Theory

Game theory- subfield of microeconomics that studies how decisions are made in a strategic

situation.

●Use game theory to analyze oligopoly should behave given potential reaction of its

rivals

●Players, rules. payoffs

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Document Summary

Oligopoly- industry type that"s dominated by a few large firms each of which are large enough to influence market price. Key point: because there are few large firms, actions of any one of these firms will have large effect on other firms. Collusion model- firms in oligopoly can get together and make joint decisions about price and output. Cartel- group of firms that get together and make price and output decisions. Collusion- occurs when price and quantity fixing agreements are explicitly determined. Resulting output under collusion model is monopoly outcome. Tacit collusion- occurs when one firm changes prices and other firms follow, no formal agreement is made. In order for a cartel to be successful it must satisfy 2 conditions: If everyone cheats, entire cartel can cut production and raise prices and consumers will still buy good. cartel will collapse. Game theory- subfield of microeconomics that studies how decisions are made in a strategic situation.

Related Questions

1. if the government attempts to break up a natural monopoly to enforce competition in an industry

A. the average cost of producing the good will increase

B. the smallest firm will have a significant cost advantage over the larger, less efficient firms

C. the average cost of producing the good will decrease

D. the price paid by consumers will be expected to remain the same.

2. which statement is true?

A. the monopolistic competitor always makes a profit in the short run

B. the monopolistic competitor operates at peak efficiency

C. product differentiation takes place in the minds of the buyers

D. none of these statements is true

3. Price discrimination

A. occurs when a good or service is resold

B. is prohibited by law

C. occurs when a seller charges two or more prices for the same good or service

D. occurs when the seller charges different prices for different quality products

4. Monopolistic competition may lead to each of the following except

A. inefficiency

B. overdifferentiation

C. overcapacity

D. monopoly profits

5. In the long run in monopolistic competition

A. most firms are making a profit

B. the absence of entry barriers ensures that there are no profits

C. economies of scale ensure that there are no profits

D. most firms are losing money

6. Price discrimination means

A. charging different prices for identical goods that have identical production costs

B. paying wages according to race or sex rather than productivity

C. exploiting the working masses by charging the highest single price possible.

D. eliminating all costs so that only pure profits are realized

7. The definition of monopolistic competition includes

A. few firms and ease of entry and exit

B. few firms and barrieres to entry and exit

C. many firms and barriers to entry and exit

D. many firms and ease of entry and exit

8. Which statement is true?

A. there are many firms in a monopolistically competitive industry.

B. monopolistic competitors produce an identical product

C. in order for product differentiation to take place, there must be clear physical differences amont the products sold

D. none is true

9. Long-run equilibrium for firms in monopolistically competitive industries is similar to that for firms in perfect competition in that

A. price equals minimum possible average total cost

B. price equals marginal cost

C. marginal revenue equals average total cost

D. price equals average total cost

10. Which statement is false?

A. Oligopolies are illegal in most states

B. most oligopolies engage in outright collusion

C. Ford motor company is an oligopoly

D. none of these statements is false

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.

ECON 001 Lecture Notes - Lecture 14: Tacit Collusion, Oligopoly, Microeconomics

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