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KEY CONCEPTS AND SKILLS:
Ch. 7d – Oligopoly (pg. 201 - 210
Definitions:
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Game Theory: a mathematical technique used to analyze competitive situations where the
outcome of a participant’s choice depends on the actions of other participants
Price War: competitive price cutting by firms, usually in an oligopoly, as each one tries to
capture market share from rival firms
Concentration Ratio: a measure of how much of a an industries output is produced by its
largest firms; calculated as [output of largest # firms / total industry output]
Collusion: An agreement among firms to fix prices, or divide the market between them, so
as to limit competition and maximize profit
Cartel (or Formal Collusion): a formal agreement between firms in an industry to form a
collusive oligopoly, i.e., to take action to limit competition in the industry
Non-collusive (or tacit) oligopoly: a type of oligopoly where firms do not make
agreements among themselves to fix prices or collaborate in any other way
Concepts and Applications:
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Describe, using examples, the assumed characteristics of oligopoly.
Explain why interdependence is responsible for the dilemma faced by oligopolistic firms –
whether to compete or to collude.
Explain how game theory (e.g., the prisoner’s dilemma) can illustrate strategic
interdependence and the options available to companies in an oligopoly.
Explain how a concentration ratio may be used to identify an oligopoly.
Explain the term collusion and give examples.
With reference to a diagram, explain why a cartel would want to limit competition among its
members.
Describe the conditions that make cartel structures difficult to maintain.
With reference to one or more diagrams, explain why cartels are illegal in most countries.
Explain the incentives of cartel members to cheat.
Explain price leadership as one form of tacit collusion.
Explain why the behavior of firms in a non-collusive oligopoly is strategic in order to take
account of possible actions of rivals.
Explain, with reference to a kinked demand curve, the existence of price rigidities in an
oligopoly.
Explain how elasticity accounts for the shape of the kinked demand curve.
Explain why non-price competition is common in oligopolistic markets, with reference to the
risk of price wars.
Describe, using examples, types of non-price competition.