Oligopoly and Game Theory - AP Microeconomics

What does 'mutual interdependence' mean in oligopoly?

Firms' decisions affect each other's outcomes. Each firm's actions directly influence competitors' profits and strategies.
What is the significance of a Nash Equilibrium?

No player can benefit by changing strategy unilaterally. Each player's strategy is optimal given others' strategies.
Identify the outcome of a prisoner's dilemma when both players defect.

Both players receive a lower payoff. Individual rationality leads to collectively suboptimal outcomes.
What is the Cournot model?

Oligopoly model where firms compete on output quantity. Firms choose production levels simultaneously to maximize individual profits.
Identify a feature of the Stackelberg model.

Leader-follower dynamics in output competition. Leader moves first, follower responds optimally to leader's choice.
What is the Herfindahl-Hirschman Index (HHI)?

A measure of market concentration. Higher values indicate greater market concentration and less competition.
What is the 'first-mover advantage'?

The benefit of being the first to act in a strategic situation. Early action can secure better market position or higher profits.
State the key characteristic of an oligopoly.

Interdependence among firms. Each firm's decisions directly impact competitors' profits and strategies.
Identify a common real-world example of an oligopoly.

Automobile industry. Few large manufacturers like Ford, GM, and Toyota dominate globally.
What is a duopoly?

An oligopoly with exactly two firms. Special case of oligopoly with maximum strategic interaction.
What is a tit-for-tat strategy?

Cooperating in the first move, then mimicking the opponent. Promotes cooperation by rewarding cooperation and punishing defection.
What is the role of game theory in oligopoly?

Analyzes strategic interactions among firms. Provides framework for predicting outcomes in strategic situations.
Which term describes a firm that acts as a price leader?

Dominant firm. Sets prices that smaller firms typically follow in the market.
What is a Nash Equilibrium?

A situation where no player can benefit by changing strategies unilaterally. Represents a stable outcome where all players are satisfied with their choices.
What is the payoff matrix?

A table that shows payoffs for each strategy combination. Visual tool showing outcomes for all possible strategy combinations.
Which concept describes the mutual interdependence of firms?

Strategic interaction. Firms must consider rivals' likely responses when making decisions.
What is an oligopoly?

A market structure with few firms dominating the market. Characterized by high barriers to entry and significant market power.
Define 'price leadership' in oligopoly.

One firm sets prices for others to follow. Dominant firm acts as price setter while others become price followers.
State the formula for profit in oligopoly.

$\text{Profit} = \text{Total Revenue} - \text{Total Cost}$ . Basic profit calculation applies to all market structures including oligopoly.
What is the kinked demand curve theory?

Explains price rigidity in oligopolies. Firms fear price cuts will be matched but price increases won't be.
Define the Bertrand model.

Oligopoly model where firms compete on price. Firms set prices simultaneously, leading to marginal cost pricing.
Which model describes firms colluding to set prices?

The cartel model. Firms act as monopolists by coordinating output and pricing decisions.
What is the main objective of collusion among firms?

To increase profits by reducing competition. Joint profit maximization through coordinated pricing and output decisions.
Which scenario best exemplifies a strategic barrier to entry?

Predatory pricing. Temporarily pricing below cost to drive competitors out of market.
What is a mixed strategy in game theory?

Using probabilities to choose among actions. Randomizes between pure strategies to keep opponents guessing.
What is a dominant strategy?

A strategy that is best regardless of what others do. Optimal choice remains unchanged regardless of competitors' actions.
Which option best describes a sequential game?

Players make decisions at different times. Order of moves matters for determining optimal strategies.
State the formula for calculating HHI.

$HHI = \text{sum of the squares of market shares}$ . Market shares are squared then summed to measure concentration.
What is collusion?

An agreement among firms to limit competition. Can be explicit (formal) or tacit (unspoken understanding).
Which factor leads to price stickiness in oligopolies?

Fear of price wars. Competitors match price cuts but not price increases.
What is the significance of the Cournot equilibrium?

It predicts output levels in oligopoly. Determines stable output levels when firms compete on quantity.
What is a zero-sum game?

A game where one player's gain is another's loss. Total gains and losses in the game sum to zero.
Identify a strategy to maintain collusion in an oligopoly.

Monitoring and enforcing agreements. Surveillance and punishment mechanisms prevent cheating on agreements.
In game theory, what is a strategy?

A complete plan of action for every contingency. Specifies what action to take in every possible game situation.
Which option best describes tacit collusion?

Unspoken understanding to avoid competition. Implicit coordination without formal agreements to avoid detection.
Identify the typical number of firms in an oligopoly.

Few, typically 3 to 5. Small enough for strategic interaction but large enough to avoid monopoly.
What does it mean for a firm to be a price taker?

It accepts the market price as given. Has no influence over market price due to small market share.
What role does information play in oligopoly markets?

Incomplete information affects firms' decisions. Uncertainty about rivals' actions complicates strategic decision-making.
Identify a real-world example of a cartel.

OPEC in the oil market. Organization coordinates oil production to control global prices.

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