Oligopoly and Collusion: Strategic Behavior

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Questions and Answers

What is the primary goal of a cartel?

To increase competition between its members

To promote product differentiation

To maximize the profits of the entire organization (correct)

To reduce prices and output levels

What is the primary characteristic of an international cartel like OPEC?

Its members are private organizations

It operates only in the United States

It is illegal in many countries

Its members are countries (correct)

What is a potential consequence of tacit collusion or strategic behavior among oligopolistic firms?

Maintained prices and market shares (correct)

Increased competition and lower prices

Encouraged entry of new firms

Reduced product differentiation

What is the primary problem with individual decision-making in a prisoner's dilemma?

Individuals always choose in a way that creates a less than optimal outcome for the group Signup and view all the answers

What is the purpose of strategic investments in oligopolistic industries?

To deter new entrants Signup and view all the answers

What is the primary difference between overt collusion and tacit collusion?

Overt collusion involves explicit agreements, while tacit collusion involves implicit agreements Signup and view all the answers

What is a major reason why companies in an oligopoly can maintain their dominance?

High barriers to entry Signup and view all the answers

Which of the following industries is an example of an oligopoly?

Pharmaceuticals Signup and view all the answers

What is the purpose of price fixing in an oligopoly?

To maintain a certain level of profit Signup and view all the answers

What is a characteristic of an oligopoly?

Multiple firms have significant influence over the market Signup and view all the answers

What is the result of economies of scale in an oligopoly?

Lower average costs Signup and view all the answers

What is the main difference between an oligopoly and a monopoly?

The number of firms in the market Signup and view all the answers

Why is OPEC considered an oligopoly?

Each member nation has a substantial portion of the market share Signup and view all the answers

What is the primary consequence of collusion in an oligopoly?

Reduced competition Signup and view all the answers

What is the result of OPEC lowering its supply when demand drops?

Prices increase Signup and view all the answers

Why do companies in an oligopoly choose to collaborate rather than compete?

To obtain the benefits of collaboration Signup and view all the answers

What is a common characteristic of oligopolistic markets?

Firms have significant influence over the market Signup and view all the answers

What is the purpose of the concentration ratio in an oligopoly?

To measure the market share of the largest firms Signup and view all the answers

Study Notes

Collusion and Strategic Behavior

Overt collusion is illegal, but firms may engage in tacit collusion or strategic behavior through implicit agreements.
Tacit collusion includes coordinating product differentiation and strategic investments to hinder new competition.

Cartels

A cartel consists of firms that agree to limit competition to maximize profits, operating similarly to a monopoly.
Cartels are generally illegal in the U.S. and many countries, but international cartels, like OPEC, operate legally with countries as members.

Prisoner's Dilemma

The prisoner's dilemma illustrates how individual decisions can lead to suboptimal group outcomes by encouraging non-cooperative behavior.

Advantages of Oligopolies

Oligopolistic firms collaborate to set prices or output, avoiding competition for mutual economic benefit.
Oligopolies maintain price controls, creating barriers for new market entrants, thereby protecting their revenue streams.

Barriers to Entry

High entry barriers, such as significant capital requirements and economies of scale, limit market entry for new competitors, ensuring existing firms' dominance.

Economies of Scale

Industries with significant economies of scale tend to create oligopolistic structures since large firms can reduce average costs, making it difficult for smaller companies to compete.

Definition of Oligopoly

An oligopoly involves a small number of firms that dominate a market, where each firm's actions significantly affect others.
The concentration ratio measures the market share held by the largest firms, highlighting the interdependence in decision-making.

Example of Oligopoly: OPEC

Founded in 1960 with five countries, expanded to 13 by 1975, OPEC is a prime example of an oligopoly without an overarching authority.
Member nations collectively influence supply and pricing, reacting to market changes by adjusting production levels accordingly.

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Description

Test your understanding of oligopolistic firms and their strategies, including tacit collusion, cartel formation, and competitive behavior. Learn how firms interact with each other to maximize profits and maintain market shares. Discover the differences between overt and tacit collusion and how they impact the market.