4 Oligopoly and Strategic Competition Free Online FlashCards

What defines an oligopoly?

An oligopoly is a market dominated by a small number of firms.

What is strategic interdependence?

Strategic interdependence means a firm’s decisions depend in part on what its rivals do, because each firm can affect market outcomes.

What is a best response in game theory?

A best response is the strategy that gives a player the highest payoff, given the strategies chosen by the other players.

Why is the output game a prisoner’s dilemma?

It is a prisoner’s dilemma: expanding is each firm’s dominant strategy, so both earn $400, even though holding output down together would earn each $1,000.

What can help sustain cooperation in repeated oligopoly interactions?

Future rewards or retaliation may discourage a firm from undercutting a rival. Cooperation is more sustainable when firms interact often, detect deviations quickly, and value future profits.

How do firms choose in the Cournot model?

In Cournot competition, firms choose quantities simultaneously, treating rivals’ quantities as given when choosing their own.

What drives price to marginal cost in standard Bertrand competition?

In the standard Bertrand model, firms choose prices simultaneously. With homogeneous goods, identical constant marginal costs, and no capacity constraints, equilibrium price equals marginal cost—even with two firms.

How does the Stackelberg model differ in timing from Cournot?

In Stackelberg competition, firms choose quantities sequentially: the leader moves first, and the follower observes that choice before responding. The leader anticipates the follower’s reaction.

What are collusion and a cartel, and what threatens their success?

Collusion is coordination of output or prices to raise joint profits; a formal agreement to coordinate is a cartel. Each firm may have an incentive to secretly expand output or cut price.

What rival behavior creates the kink in the kinked-demand model?

It assumes rivals match price cuts but not price increases. A cut then brings little extra business, while an increase risks losing many customers, making moderate price changes unattractive.

What makes a set of strategies a Nash equilibrium?

A Nash equilibrium is a set of strategies in which every player is choosing a best response to the others; no player can gain by changing strategy alone.

What is a dominant strategy?

A dominant strategy gives a player the highest payoff regardless of what the other player does.