Unit 4 Guide: Strategic Behavior in Markets

Oligopoly

A market structure dominated by a few large firms.

Mutual Interdependence

Each firm's decisions are influenced by the expected reactions of its rivals.

Collusion

An agreement between firms to limit output and raise prices to increase profits.

Cartel

A formal organization of producers that agree to coordinate prices and production.

High Barriers to Entry

Obstacles that make it difficult for new firms to enter a market.

Market Power

The ability of firms to set prices above marginal cost.

Dominant Strategy

A strategy that is the best choice for a player regardless of what other players choose.

Nash Equilibrium

A situation where no player has an incentive to deviate from their chosen strategy.

Prisoner's Dilemma

A scenario illustrating why cooperation is difficult to maintain among rational players.

Payoff Matrix

A table that shows the payoffs for each player based on their strategies.

Kinked Demand Curve

A model that explains price rigidity in an oligopoly due to differing reactions to price changes.

Elastic Demand

Demand that is sensitive to price changes; price increase leads to decreased quantity demanded.

Inelastic Demand

Demand that is not sensitive to price changes; price decrease does not significantly increase quantity demanded.

Game Theory

The study of strategic decision-making among interdependent players.

Players

The decision-makers involved in a game, such as competing firms.

Strategies

The choices available to players in a game.

Payoffs

The profits or outcomes associated with each combination of strategies.

Firm A

The player typically represented on the left side of a payoff matrix.

Firm B

The player typically represented on the top side of a payoff matrix.

Stickiness of Prices

The tendency for prices to remain stable even in the face of changing market conditions.

Anticipated Reactions

Expected responses of rivals to a firm's pricing and output decisions.

Cheating in Cartels

When a firm produces more than its agreed quota to increase individual profits.

Price Makers

Firms that have the ability to set prices in a market.

Output Decisions

Choices made by firms regarding the quantity of goods to produce.

Suboptimal Outcome

A result that is less than the best possible outcome for all players involved.

Resource Control

Having ownership or access to essential inputs that are critical for production.

Market Share

The portion of a market controlled by a particular company or product.