MicroeconomicsLesson 2 of 2 in the course Monopolistic Competition and Oligopoly

Oligopoly: Interdependence, Collusion, Game Theory, and Policy

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

This lesson introduces oligopoly, a market structure in which a small number of large firms account for most sales. Understanding oligopoly matters because the decisions of each firm can affect its rivals and the market as a whole.

An oligopoly exists when a small number of firms have all or most of the sales in an industry. Examples include commercial aircraft manufacturing, automobiles, cable television, and commercial air travel.

All flashcards

What is an oligopoly?
A market in which a small number of firms account for most industry sales.
What is mutual interdependence in an oligopoly?
A condition in which firms consider how rivals may respond to their decisions.
What is collusion?
Coordination among firms to limit competition, often by restricting output or keeping prices high.
What is a kinked demand curve?
A demand pattern based on rivals matching price cuts but not price increases.
What is a dominant strategy?
A strategy that gives a player a better outcome regardless of other players' choices.

Quiz questions

  1. Two firms can hold output down or increase it. Each earns $1,000 if both hold output down, $1,500 if it increases output while its rival holds back, and $400 if both increase output. What outcome results when both choose their individually dominant strategy?Answer: Both increase output and earn $400 each.
  2. In the kinked-demand model, how are rivals expected to respond to a firm's price changes?Answer: They match price cuts but do not match price increases.
  3. Which description distinguishes a cartel from collusion in general?Answer: A cartel is a group of firms with a formal agreement to coordinate.
  4. How is collusion generally treated under United States antitrust law?Answer: It is generally illegal under antitrust law.
  5. What is a central aim of antitrust policy toward oligopolies?Answer: Encourage efficiencies and innovation while deterring anticompetitive conduct.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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