Managerial Economics: Oligopoly Pricing

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Questions and Answers

Which of the following is a primary focus of managerial economics in the context of oligopoly pricing?

  • Determining optimal production levels in perfectly competitive markets.
  • Maximizing social welfare through government intervention in monopolistic markets.
  • Understanding consumer behavior in perfectly competitive markets.
  • Analyzing firm interactions and strategic decision-making in markets with few dominant players. (correct)

In an oligopoly, what is the most significant factor that complicates pricing decisions for firms?

  • The independence of each firm's actions.
  • The large number of firms in the industry.
  • The anticipated reactions of competitors to a firm's pricing strategy. (correct)
  • The absence of barriers to entry.

What distinguishes oligopoly from other market structures concerning the number of firms and their market influence?

  • Oligopoly consists of a single firm dominating the entire market.
  • Oligopoly involves many firms producing homogenous products with perfect information.
  • Oligopoly features numerous small firms, each with negligible market power.
  • Oligopoly is characterized by a few dominant firms that collectively exert significant market influence. (correct)

Which of the following best describes a scenario where game theory would be most applicable?

<p>A firm in a duopoly deciding whether to lower its price, knowing the other firm might react. (C)</p> Signup and view all the answers

What is the likely outcome of a collusive agreement between firms in an oligopoly?

<p>Higher prices and reduced output, similar to a monopoly outcome. (D)</p> Signup and view all the answers

Which of the following is an example of a barrier of entry that is typical of an oligopoly?

<p>High capital requirements or strong brand loyalty. (B)</p> Signup and view all the answers

In the context of oligopoly, what does 'price leadership' typically refer to?

<p>A dominant firm setting the price, which other firms then follow. (B)</p> Signup and view all the answers

How might advertising and product differentiation influence pricing power in an oligopoly?

<p>They increase pricing power by creating brand loyalty and perceived differences. (B)</p> Signup and view all the answers

What is a potential consequence of a 'price war' in an oligopolistic market?

<p>Lower profits for firms, potentially leading to exit or consolidation. (C)</p> Signup and view all the answers

Why is the demand curve faced by an individual firm in an oligopoly often considered to be 'kinked'?

<p>Because other firms will match price decreases but not price increases. (B)</p> Signup and view all the answers

Flashcards

Oligopoly

Market structure with a few firms, interdependent decisions, and strategic interactions.

Kinked Demand Curve

When one firm changes its price, other firms will match the price cut, but not match price increases.

Collusion

A situation where firms coordinate their activities to achieve a monopoly outcome.

Cartel

A group of firms that explicitly agree to restrict output, raise prices, and divide profits.

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Nash Equilibrium

An equilibrium in a non-cooperative game where each player's strategy is optimal given the strategies of others.

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Dominant Strategy

A strategy that is optimal regardless of what the other player does.

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Oligopoly Pricing

Pricing strategies employed by firms in an oligopoly market.

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Study Notes

  • This lecture discusses oligopoly pricing within the context of a Foundation Course in Managerial Economics.
  • The course aims to provide students with a fundamental grasp of microeconomic theory.
  • Microeconomic theory helps in understanding the behavior of households and firms.
  • It also explains their interactions within different market structures.
  • The course's goal is to equip students with economic concepts applicable to managerial decision-making.
  • These concepts can be applied in various organizational settings.
  • The course aims to develop a solid understanding of economic tools with direct managerial applications.

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