AP Microeconomics Flashcards: Oligopoly And Game Theory

What this deck covers

This deck focuses on Oligopoly And Game Theory, giving you a quick way to review the definitions, rules, and examples that matter most for AP Microeconomics.

How to use these flashcards

Work through these flashcards in short sessions. Try to answer each prompt before flipping the card, then revisit any cards you miss until the explanation feels automatic.

Flashcard 1: What does 'mutual interdependence' mean in oligopoly?

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

Flashcard 2: Identify a common real-world example of an oligopoly.

Answer: Automobile industry. Few large manufacturers like Ford, GM, and Toyota dominate globally.

Flashcard 3: State the formula for profit in oligopoly.

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

Flashcard 4: Identify the outcome of a prisoner's dilemma when both players defect.

Answer: Both players receive a lower payoff. Individual rationality leads to collectively suboptimal outcomes.

Flashcard 5: Which factor leads to price stickiness in oligopolies?

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

Flashcard 6: State the formula for calculating HHI.

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

Flashcard 7: What is the Herfindahl-Hirschman Index (HHI)?

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

Flashcard 8: What is collusion?

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

Flashcard 9: What is the significance of a Nash Equilibrium?

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

Flashcard 10: Identify the outcome of a prisoner's dilemma when both players defect.

Answer: Both players receive a lower payoff. Individual rationality leads to collectively suboptimal outcomes.

Flashcard 11: What is the Cournot model?

Answer: Oligopoly model where firms compete on output quantity. Firms choose production levels simultaneously to maximize individual profits.

Flashcard 12: Identify a feature of the Stackelberg model.

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

Flashcard 13: What is the 'first-mover advantage'?

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

Flashcard 14: What is the main objective of collusion among firms?

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

Flashcard 15: What is the Herfindahl-Hirschman Index (HHI)?

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

Flashcard 16: Identify a real-world example of a cartel.

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

Flashcard 17: What is the 'first-mover advantage'?

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

Flashcard 18: What is the significance of a Nash Equilibrium?

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

Flashcard 19: State the key characteristic of an oligopoly.

Answer: Interdependence among firms. Each firm's decisions directly impact competitors' profits and strategies.

Flashcard 20: Identify a common real-world example of an oligopoly.

Answer: Automobile industry. Few large manufacturers like Ford, GM, and Toyota dominate globally.

Flashcard 21: Define 'price leadership' in oligopoly.

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

Flashcard 22: Identify the typical number of firms in an oligopoly.

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

Flashcard 23: What is a duopoly?

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

Flashcard 24: What is a mixed strategy in game theory?

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

Flashcard 25: What is a tit-for-tat strategy?

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

Flashcard 26: What is the role of game theory in oligopoly?

Answer: Analyzes strategic interactions among firms. Provides framework for predicting outcomes in strategic situations.

Flashcard 27: Which term describes a firm that acts as a price leader?

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

Flashcard 28: What is a Nash Equilibrium?

Answer: A situation where no player can benefit by changing strategies unilaterally. Represents a stable outcome where all players are satisfied with their choices.

Flashcard 29: What role does information play in oligopoly markets?

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

Flashcard 30: Which option best describes tacit collusion?

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

Flashcard 31: Which option best describes a sequential game?

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

Flashcard 32: What is the kinked demand curve theory?

Answer: Explains price rigidity in oligopolies. Firms fear price cuts will be matched but price increases won't be.

Flashcard 33: In game theory, what is a strategy?

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

Flashcard 34: What is a tit-for-tat strategy?

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

Flashcard 35: What is the payoff matrix?

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

Flashcard 36: Identify a feature of the Stackelberg model.

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

Flashcard 37: Which concept describes the mutual interdependence of firms?

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

Flashcard 38: What is the role of game theory in oligopoly?

Answer: Analyzes strategic interactions among firms. Provides framework for predicting outcomes in strategic situations.

Flashcard 39: What is an oligopoly?

Answer: A market structure with few firms dominating the market. Characterized by high barriers to entry and significant market power.

Flashcard 40: What does it mean for a firm to be a price taker?

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

Flashcard 41: Define 'price leadership' in oligopoly.

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

Flashcard 42: State the formula for profit in oligopoly.

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

Flashcard 43: What is the kinked demand curve theory?

Answer: Explains price rigidity in oligopolies. Firms fear price cuts will be matched but price increases won't be.

Flashcard 44: Define the Bertrand model.

Answer: Oligopoly model where firms compete on price. Firms set prices simultaneously, leading to marginal cost pricing.

Flashcard 45: Which model describes firms colluding to set prices?

Answer: The cartel model. Firms act as monopolists by coordinating output and pricing decisions.

Flashcard 46: What is the main objective of collusion among firms?

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

Flashcard 47: What is the significance of the Cournot equilibrium?

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

Flashcard 48: Which scenario best exemplifies a strategic barrier to entry?

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

Flashcard 49: What is a dominant strategy?

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

Flashcard 50: What does 'mutual interdependence' mean in oligopoly?

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

Flashcard 51: What is a mixed strategy in game theory?

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

Flashcard 52: What is the Cournot model?

Answer: Oligopoly model where firms compete on output quantity. Firms choose production levels simultaneously to maximize individual profits.

Flashcard 53: Which model describes firms colluding to set prices?

Answer: The cartel model. Firms act as monopolists by coordinating output and pricing decisions.

Flashcard 54: What is a dominant strategy?

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

Flashcard 55: What is the payoff matrix?

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

Flashcard 56: Which option best describes a sequential game?

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

Flashcard 57: What is an oligopoly?

Answer: A market structure with few firms dominating the market. Characterized by high barriers to entry and significant market power.

Flashcard 58: What is a zero-sum game?

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

Flashcard 59: State the formula for calculating HHI.

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

Flashcard 60: What is collusion?

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

Flashcard 61: Which factor leads to price stickiness in oligopolies?

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

Flashcard 62: What is the significance of the Cournot equilibrium?

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

Flashcard 63: What is a zero-sum game?

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

Flashcard 64: What is a Nash Equilibrium?

Answer: A situation where no player can benefit by changing strategies unilaterally. Represents a stable outcome where all players are satisfied with their choices.

Flashcard 65: Identify a strategy to maintain collusion in an oligopoly.

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

Flashcard 66: What is a duopoly?

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

Flashcard 67: Define the Bertrand model.

Answer: Oligopoly model where firms compete on price. Firms set prices simultaneously, leading to marginal cost pricing.

Flashcard 68: In game theory, what is a strategy?

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

Flashcard 69: Which scenario best exemplifies a strategic barrier to entry?

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

Flashcard 70: Which option best describes tacit collusion?

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

Flashcard 71: State the key characteristic of an oligopoly.

Answer: Interdependence among firms. Each firm's decisions directly impact competitors' profits and strategies.

Flashcard 72: Which concept describes the mutual interdependence of firms?

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

Flashcard 73: Identify the typical number of firms in an oligopoly.

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

Flashcard 74: What does it mean for a firm to be a price taker?

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

Flashcard 75: Which term describes a firm that acts as a price leader?

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

Flashcard 76: Identify a strategy to maintain collusion in an oligopoly.

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

Flashcard 77: What role does information play in oligopoly markets?

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

Flashcard 78: Identify a real-world example of a cartel.

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