ECO 182 Study Guide - Final Guide: Nash Equilibrium, Economic Equilibrium, Oligopoly

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redjackal375

25 May 2018

School

University at Buffalo

Department

Economics

Course

ECO 182

Professor

Paul Atkinson

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ECO182 study guide 3: Rise of the machines

Chapter 15: Oligopoly

❖ Oligopoly market structure

➢ Barriers prevent entry of new firms (natural or legal)

▪ Legal arises when demand and cost leave room for a larger number of firms

➢ Small number of firms (only a few in oligopoly)

▪ Interdependence- each firm’s profit relies on the others actions

▪ Temptation to cooperate/ form a cartel

• Cartel- a group of firms acting together to limit output,

raise price, and increase profit

❖ Duopoly- market of two firms

➢ Uses game theory

➢ Captures the essence of oligopoly (small number of firms, nearly

identical or differentiated products, and barriers that limit entry)

➢ For an individual firm, the minimum ATC is when ATC=MC

➢ For an industry, the price is set by one firm’s ATC and the quantity

from the demand curve (easy way is to find the price first, then

see the quantity demanded on the demand curve)

❖ Game theory- tool to study strategic behavior, behavior that is expected of others and the

mutual recognition of interdependence (how others behave and if it will benefit you too)

➢ Prisoner’s dilemma- (normally in a duopoly) where two people are in a situation where

they have to decide between two things, knowing the outcomes of their own decisions,

but do not know what the other person thinks

▪ Ex. If Nancy and Johnathan get arrested and separated for questioning, they each

have the decision to confess or deny. If one confesses they only get a year and the

other gets 4 years of jail time. They can each confess and get 3 years. If both deny,

they get 2 years. They do not know what the other one will choose.

• Ideally both want to deny because they will get a

year (self-interest)

• When they each work in their own self-interest, it

leads to a Nash equilibrium as the outcome and

they both get 2 years

• Some instances will have more than one Nash

equilibrium if both work in the self-interest of the

companies (see question 30 on practice exam)

• Dilemma occurs when each person contemplates

the consequences of each decision and what will

happen to the other person, it leads to equilibrium

of the game (which isn’t always the best outcome)

❖ Cheating in a duopoly

➢ Collusion- agreement between two or more firms to restrict output, raise price, and

increase profits that are illegal in the US

▪ Firms in these collusive agreements are called cartels

▪ Ex. OPEC sets oil prices and can restrict output

Nancy: confess- 3

years

Johnathan:

confess- 3 years

Nancy: confess-

4 years

Johnathan:

deny- 1 year

Nancy: deny- 1

year

Jonathan:

confess- 4 years

Nancy: deny- 2

years

Johnathan:

deny- 2 years

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▪ When in one, firms act like a monopoly and

maximize economic profit

• Marginal revenue acts like a monopoly MR

curve and produce less than what the market

demands and set price higher

▪ Profit- MC=MR (MR is demand)

▪ Cost curve- horizontal sum of the MC curves of

the two firms

▪ Maximized profit- MC1=MR

➢ Firms in a cartel can either cheat or comply

▪ Like the prisoner’s dilemma, there are four options

▪ When one firm cheats:

• They (the firm that cheated) produce more items, price falls, and have more

economic profit (win)

• Other firm ATC exceeds price and incur economic loss (lose)

▪ When both cheat:

• Becomes like perfect competition and both firms earn 0 economic profit

• Is the Nash equilibrium

➢ R&D game

▪ Part of the oligopoly games and also prisoner’s dilemma

▪ Game of chicken- normally arises with new technology that cannot be patented

• Both firms can benefit from the R&D of either firm (one spends the money and

the other mooches off)

• It’s like a game of chicken because the first person has to put the money in R&D

while the other just gets the benefits

• Equilibrium is when one firm does the R&D

 Ex. If Samsung invests for the development of a new type of glass for their

phones, a year later Apple uses that same technology in their phones even if

they did not invest in developing that glass

➢ Repeated Duopoly Game

▪ If played repeatedly, it is possible for duopolies to successfully collude and make a

monopoly profit

▪ Cooperative equilibrium-firms make and share

monopoly profit that has additional punishment

strategies that enable them to achieve it

▪ Tit-for-tat- one player cooperates if the other player

cooperated in the previous but cheats now since

the other player cheated previously (punishment

lite)

• Ex. If you play monopoly fairly this game after

stealing from the bank last time, but your friend

“loses track” of how many rolls they’ve been in jail for this game while playing a

fair game last time

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▪ Trigger- one cooperates if the other cooperates until one decides to cheat to punish

the other one (punishment harsh)

• Ex. When playing monopoly with a friend, you two plays fairly every time but this

time they take more houses than they paid for

▪ Limit pricing- set price high enough to keep competitors out

➢ Antitrust law- regulate oligopolies and prevents them from becoming or behaving like

monopolies (these laws want completion in markets and not for one firm to set prices)

▪ Sherman Act, 1890- outlaw any “combination, trust, or

conspiracy that restricts interstate trade” and prohibited

the “attempt to monopolize” (don’t want them to work

together to create a monopoly) (think sharing-Sherman)

▪ Clayton act, 1914- make illegal business practices like

price discrimination, interlocking directorships, and

acquisition of a competitor’s shares if they lessen

competition or create monopolies (eliminate unfair

business practices that lessen competition) (think

Clayton-competition)

▪ Price fixing is illegal (violates antitrust law)

▪ Resale price maintenance- manufacture agrees with the distributer on the price a

product can be resold

• Inefficient: promotes monopoly pricing

• Efficient: incentive to provide in efficient level of retail service in selling a

product

▪ Tying arrangement- sell one product if they buy another different product as well

• Make larger profit

• Price discriminate and take a larger consumer surplus

• Ex. printers and printer ink, razors and blades

▪ Predatory pricing- set a low price to drive competition out of business

• Not always found/skeptism if it occurs

• Ex. Walmart, probably

▪ HHI- FTC guideline that is challenged or blocked if its HHI is above 100 or 200

Chapter 16: Public Choices, Public Goods, and Healthcare

❖ Public good- serve the greater community

❖ Excludable- those who pay enjoy its benefits (exclude those who don’t pay)

➢ Ex. Netflix, concerts, restaurants, those coffee shops that make you pay to use their Wi-

Fi or bathroom

❖ Nonexcludable- anyone can use them

➢ Ex. NPR, public parks, services of the NYPD, watching Office reruns on cable

❖ Rival- each use decreases the quantity available for someone else (think physical goods)

➢ Ex. 1,000 bobble head bulls at a bulls game, buying and eating a brownie

❖ Nonrival- does not decrease in quantity when someone uses it (think services)

➢ Ex. UBPD, downloading a textbook online

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Related Questions

1. A monopoly market structure is characterized by

a. large number of firms, standardized products, easy entry and exit.

b. large number of firms, differentiated products, easy entry and exit.

C. small number of firms, standardized or differentiated products, difficult entry.

d. one firm, a unique product without close substitutes, and impossible entry.

e. one firm, differentiated product, impossible entry.

2. Which of the following is not a characteristic of monopolistic competition?

a. Differentiated products

b. A downward-sloping demand curve for individual firms

c. Firms that are price makers

d. Impeded entry into the industry

e. A large number of firms

3. One factor that distinguishes oligopoly from other market structures is

a. the ease of entry into the market.

b. the interdependence of firms.

c. the slope of the demand curve.

d. the degree of product differentiation.

e. the amount of advertising expenditures.

lavenderbat941

Homework help and study guide help, all multiple choice

A monopolist:

A) can sell as much as it wants at the chosen price because it is the only seller.

B) can increase the price only if it is willing to decrease the quantity sold.

C) can increase the price and the quantity sold at the same time.

D) is not restricted by the law of demand.

A monopolistically competitive firm:

A) produces where marginal revenue equals marginal cost and charges the price consumers are willing to pay as given by the demand curve.

B) produces where marginal cost equals average total cost and charges the price consumers are willing to pay as given by the demand curve.

C) chooses price and quantity based on where the marginal cost curve meets the demand curve.

D) chooses price and quantity based on where the average total cost curve meets the demand curve.

21) Oligopoly is A) like a monopoly because there are barriers to entry. B) like perfect competition because oligopoly firms all sell homogeneous goods. C) like monopolistic competition because oligopoly firms all sell differentiated goods D) like perfect competition because there are many firms in the industry
ECON 1102 (Microeconomics) Test 4 (043015)

In ________ market structure, a firm's output depends ________.

A) an oligopoly; only on its own marginal revenue and marginal cost curves

B) a monopolistically competitive; in part on its competitors' price and quantity decisions

C) an oligopoly; in part on its competitors' price and quantity decisions

D) a monopolistically competitive; only on its marginal revenue curve

1)Which of the following is true about the Sherman Act?

A.It prohibited price discrimination.

B. It prohibited price-fixing and collusion.

C. It prohibited mergers if it led to weakened competition.

D. It made engaging in predatory activities illegal.

E. It encouraged firms to take advantage of the patent system.

2)
Which of the following is true of price discrimination?

A. Customers need to differ in their willingness to pay for price discrimination to occur.

B. Customers need to have a unit elastic demand curve for price discrimination to occur.

C. Price discriminators profit by charging a uniform price to all customers.

D. Price discriminators lack the incentive to reduce their average total cost of production.

E. Customers can easily resell a good to other customers if there exists price discrimination in the market for the good.

3) Which of the following types of firms do not practice price discrimination?

A. Airlines

B. Movie theaters

C. Soft drink companies

D. Colleges

E. Amusement parks

4) Oligopoly, like perfect competition, is a market structure in which firms can easily enter and leave the industry.

a. True
b. False

Monopolistic competition is characterized by:

A. A large number of firms selling differentiated products.

B. A perfectly elastic demand curve.

C. High barriers to entry.

D. large number of firms selling identical products.

E. A small number of firms selling differentiated products.

6) Which of the following is not a source of product differentiation?

A. Prestige considerations in products

B. Differences in the cost of production of products

C. Physical differences in products

D. Differences in the services provided by firms

E. Differences in the location of sales outlets

7) The restaurants in San Francisco can probably be categorized as examples of firms

A. operating in an oligopolistic market.

B. operating in a monopolistically competitive market

C. operating in a perfectly competitive market

D. forming a cartel.

E. Operating in a monopolistic market

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ECO 182 Study Guide - Final Guide: Nash Equilibrium, Economic Equilibrium, Oligopoly

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