ECON 1000 Chapter Notes - Chapter 17: Oligopoly
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Chapter 17 Oligopoly
Oligopoly: A market structure in which only a few firms offer similar or identical
The actions of any one of the firms can have a large impact on the market.
Game Theory: The study of how people behave in strategic situations.
Collusion: An agreement among firms in a market about quantities to produce or prices
Cartel: A group of firms acting in unison.
Nash Equilibrium: A situation in which economic actors interacting with one another
each choose the best strategy given the strategies that all the other actors have chosen.
When firms in an oligopoly individually choose production to maximize profit, the
produce a quantity of output greater than the level produced by monopoly and less than
the level produced by competition. The oligopoly price is less than the monopoly priced
but greater than the competitive price (which equals marginal cost).
The Output Effect: Price is above marginal cost, selling more at the going price will
The Price Effect: Raising production will increase the total amount sold, which will
lower the price of the product and lower the profit on all other sold.
When the market size rises the magnitude of the price effect falls.
As the number of sellers in a oligopoly rises, the market looks more like a competitive
market. The price approaches marginal cost and the quantity produced approaches the
socially efficient level.
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.
Resale Price Maintenance: When a seller of a product sells its products to a reseller and
demands a minimum sale price.
Business practices that appear to reduce competition may in fact have legitimate
Predatory Pricing: Cutting pricing in an effort to drive a competitor out of a market.
This typically backfires as the firm that is predatory will typically bear more of the loss in
the long run.
Tying: Bundling uneven products together in order to force the sale of the weaker one.
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