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KU / Economics / ECON 142 / What does oligopoly denote?

What does oligopoly denote?

What does oligopoly denote?


School: Kansas
Department: Economics
Course: Microeconomics
Professor: Brian staihr
Term: Fall 2016
Tags: Econ, 142, and final
Cost: 50
Name: ECON 142 Final Study Guide
Description: This study guide covers everything since the last test, and has practice questions.
Uploaded: 12/10/2016
8 Pages 120 Views 10 Unlocks

Notes for Final

What is the meaning of oligopoly?

Week 14

Oligopoly - small number of firms, usually 2-12. difficult to enter  market.

High degree of interdependence among firms, similar or  differentiated product.


economies of scale

legal barriers

control over key inputs to production


firms base decisions on what other firms are doing.

Game Theory

game must have players, rules, payoffs, strategies

Two players: Firm 1 and 2

Strategies: discount or no discount

Rules: each player chooses strategy simultaneously, without  knowledge of the other’s chosen strategy


neither firm discount: splits market

A strategy that firm never plays is called what?

both discount: split market and sells more

1 discount and 2 doesn’t: 1 will sell a ton and 2 won’t sell hardly  any If you want to learn more check out What does altruistic behavior mean?

2 discount and 1 doesn’t: same thing

Nash Equilibrium

circle and square in the same box. situation where each player  chooses best strategy for them. If you want to learn more check out What is the chemical symbol of nitrogen?

It is possible to have two nash equilibrium.

A strategy that firm never plays is called a dominated strategy. A strategy that a firm always plays is called a dominant


Week 15

Finishing Oligopoly:

Sequential Game:

One player moves first; this is done with a game tree.

Solution should be written like this:

“When firm 1 moved first, Firm 1 Plays B and firm 2 plays X”

What are the three types of price discrimination?

First Mover Advantage: When a firm gets a higher payoff when it  moves first.

Limit Pricing -

You own the only coffee shop in town

You hear a new entrant is coming in We also discuss several other topics like The symbol for the element sodium is what?

Do you lower price in advance of new entrant, hoping to keep him out  of market?

will the entrant enter anyway?

Bertrand Model: One firm reacts to the price that another firm is  charging

Cournot Model: One firm reacts to the quantity of output that  another firm si producing

Dominant Firm Model: A single firm sets the price in a market and  the competitive fringe must match

Cartel Model: group of firms that acts as a single firm regarding  decisions

Price Collusion - Agreement among firms to set the price at a certain  level. implicit and explicit

Utility - Satisfaction/Happiness

Utility = putting a number on it… “A filet from Ruth’s steakhouse: 100”

Diminishing Marginal Utility - as you consume more units of a  thing.. the amount if utility decreases per unit.



1. buy the thing that gives you the biggest MU/P

2. Since MU changes as you consume more, but price doesn’t, the MU/P  will change as you buy more Don't forget about the age old question of Transmission genetics means what?

3. If you hit the point where MU/P is equal between the two choices,  you’ve reached a situation where you can’t make yourself better off by  changing.

Indifference Curves and Budget Constraints

Set of combination of goods that gave the same amount of utility. Week 16


If we can get to prized happiness consuming only one of two products  only, they are substitutes. If you need to consume both products to  reach the happiness you desire, than they are complements.

Indifference Curves can’t cross each other.

Budget Constraint - All the combinations you can afford is graphed  and called the budget line. All the area below this line is called the  opportunity set.

Pricing Strategy or Price Discrimination:

Law of One Price - Identical products should sell for the same price  everywhere.

Arbitrage - Buy low and sell high

Transaction Costs - associated with the act of buying or selling. Law  of one price holds only if transaction costs are zero. Transaction costs  are never zero.

Price Discrimination - charging two different prices to two different  people for the same product.

Three necessities to price discriminate:

4. firm must possess some sort of market power. If you want to learn more check out What are the characteristics of living things?

5. consumers must have different willingness to pay and firm knows this 6. firm must be able to segregate customers into groups and prevent  reselling.

Three types of price discrimination

1. First Degree - every customer is charged exactly what he or she is  willing to pay. (Perfect)

2. Second Degree - Price per unit varies depending on how many units  you buy.

3. Third Degree - Customers are spot into groups and each group is  charged a different price

Maximizing Profits Using 3rd Degree Price Disc:

Three decisions:

1. right quantity to produce overall

2. right quantity in each market

3. Prices in both markets.

Level of overall output:

MR in Market 1 = MR in Market 2 = MC

Two-Part Tariff - Customer pays one price for the right to buy as  much of a related good at another price.


Practice Problems:

1. Monopoly is the firm that is the only seller of a good/service that  doesn’t have a close _____. We also discuss several other topics like Why does methylation turn dna into heterochromatin?

a. complement

b. substitute

c. externalities

d. none of the above’

2. Which of the following is incorrect when you compare the  monopolist with the firm in the perfectly competitive market? a. monopolist charges a higher price

b. monopolist produces less output

c. monopolist produces deadweight loss

d. all of the above are correct

3. An automobile company and a tire company merged. This is an  example of a _____________.

a. collusion

b. vertical merger

c. horizontal merger

d. none of the above

Company Market Share

Hewlett-Packard 29

Dell 22

Acer 11

Toshiba 10

Apple 10

Others 18

4. What is the four-firm concentration in this market? a. 52

b. 62

c. 72

d. 82

5. Dell and Acer are trying to merge. What would you expect  regarding this merge?

a. A merge will be approved with no challenge

b. A merge may be challenged

c. A merge will be challenged

d. None of the above

6. According to class, price discrimination is defined as charging

_____ price for the ______ product.

a. same, different

b. same, same

c. different, different

d. different, same

7. Furniture stores often set prices higher and let their sales staff  offer price discounts depending on a customer’s willingness to  pay. This pricing strategy is an attempt to implement: a. 1st degree price discrimination

b. 2nd degree price discrimination

c. 3rd degree price discrimination

8. Which of the following is not a requirement of third degree price  discrimination?

a. producer must have market power

b. consumers are able to resell goods

c. producer can differentiate customers by price elasticity of  demand

d. none of the above

9. Indifference Curves can’t cross each other.

a. True

b. False

10. Which model is present: A firm reacts to the PRICE that  another firm is charging.

a. Bertrand

b. Cournot

c. Dominant Firm

d. Cartel


1. b

2. d

3. b

4. c

5. b

6. d

7. a

8. b

9. a

10. a

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