BE BLOCK 2.docx

Chapter 13: Market Structures III: Oligopoly Oligopoly; competition among the few – a market structure in which only a few sellers offer similar or identical products and dominate the market. Concentration ratio; the proportion of total market share accounted for by a particular number of firms. Cha...

Chapter 13: Market Structures III: Oligopoly Oligopoly; competition among the few – a market structure in which only a few sellers offer similar or identical products and dominate the market. Concentration ratio; the proportion of total market share accounted for by a particular number of firms. Characteristics of oligopoly Firms in oligopolistic market structures do sell products that are similar but may seek to differentiate themselves in some way. Market segments; the breaking down of customers into groups with similar buying habits or characteristics. Because oligopolistic markets are dominated by a few large firms, they are said to be interdependent. Collusion; an agreement among firms in a market about quantities to produce or prices to charge. Cartel; a group of firms acting in unison. The equilibrium for an oligopoly. Nash equilibrium; a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all other actors have chosen. Game theory and the economics of cooperation Game theory; the study of how people behave in strategic situations. Payoff matrix; a table showing the possible combination of outcomes (payoffs) depending on the strategy chose. Prisoner’s dilemma; a particular ‘game’ between two captured prisoners that illustrates why cooperation is difficult to maintain even when its mutually beneficial. Dominant strategy; a strategy that is best for a player in a game regardless of the strategies chosen by the other players. Other examples of the prisoner’s dilemma Advertising Common resources Nash equilibrium Cooperative and non-cooperative games Tacit collusion; when firm behavior results in a market outcome that appears to be anti-competitive but has arisen because firms acknowledge they are interdependent. Sequential move games; games where players make decisions in sequence with some players able to observe the strategic choices of others. Entry barriers in oligopoly Brand proliferation; a strategy designed to deter entry to a market by producing a number of products within a product line as different brands. Public policy towards oligopolies Policymakers use competition law to prevent oligopolies form engaging in behavior that reduces competition. The application of these laws can be controversial because some behavior that may seem to reduce competition may in fact have legitimate business purposes. Three examples of controversial business practice: Resale Price Maintenance Predatory or Destroyer Pricing; a situation where firms hold price below average cost for a period to try and force out competitors or prevent new firms from entering the market. Tying