Oligopoly and Game Theory - AP Microeconomics

A game where one player's gain is another's loss. Total gains and losses in the game sum to zero.

Incomplete information affects firms' decisions. Uncertainty about rivals' actions complicates strategic decision-making.

Predatory pricing. Temporarily pricing below cost to drive competitors out of market.

A strategy that is best regardless of what others do. Optimal choice remains unchanged regardless of competitors' actions.

To increase profits by reducing competition. Joint profit maximization through coordinated pricing and output decisions.

It accepts the market price as given. Has no influence over market price due to small market share.

Players make decisions at different times. Order of moves matters for determining optimal strategies.

An oligopoly with exactly two firms. Special case of oligopoly with maximum strategic interaction.

Monitoring and enforcing agreements. Surveillance and punishment mechanisms prevent cheating on agreements.

It predicts output levels in oligopoly. Determines stable output levels when firms compete on quantity.

Cooperating in the first move, then mimicking the opponent. Promotes cooperation by rewarding cooperation and punishing defection.

One firm sets prices for others to follow. Dominant firm acts as price setter while others become price followers.

Firms' decisions affect each other's outcomes. Each firm's actions directly influence competitors' profits and strategies.

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

No player can benefit by changing strategy unilaterally. Each player's strategy is optimal given others' strategies.

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

Fear of price wars. Competitors match price cuts but not price increases.

Using probabilities to choose among actions. Randomizes between pure strategies to keep opponents guessing.

A measure of market concentration. Higher values indicate greater market concentration and less competition.

Leader-follower dynamics in output competition. Leader moves first, follower responds optimally to leader's choice.

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

Few, typically 3 to 5. Small enough for strategic interaction but large enough to avoid monopoly.

A complete plan of action for every contingency. Specifies what action to take in every possible game situation.

A table that shows payoffs for each strategy combination. Visual tool showing outcomes for all possible strategy combinations.

Strategic interaction. Firms must consider rivals' likely responses when making decisions.

Unspoken understanding to avoid competition. Implicit coordination without formal agreements to avoid detection.

$\text{Profit} = \text{Total Revenue} - \text{Total Cost}$. Basic profit calculation applies to all market structures including oligopoly.

An agreement among firms to limit competition. Can be explicit (formal) or tacit (unspoken understanding).

Dominant firm. Sets prices that smaller firms typically follow in the market.