Reading notes--Principles of Economics (chapter17)

Summary

Chapter 17 is Oligopoly. This chapter introduces oligopoly, a kind of market structure.

• Oligopoly is a market structure in which only a few sellers offer similar or identical products

Prisoner Dilemma

Prisoners’ dilemma is a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

• Each player will choose the best strategy for them regardless of the strategies chosen by others.

• In this picture, each player will choose to defect although cooperation is mutually beneficial.

Nash equilibrium

• Each company will choose to produce more goods in order to get more market shares rather than producing fewer to keep the market price high.

• As the supply increases, the market price decreases.

• Each company stops producing more goods as their total revenue decreases, the quantity they produce is called Nash equilibrium.

• The quantity supplied in oligopoly is greater than that in monopoly, but smaller than that in the competitive market.

Definitions

1.Oligopoly– a market structure in which only a few sellers offer similar or identical products

2.Cartel– a group of firms acting in unison

3.Prisoners’ dilemma– a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

4.Game theory– the study of how people behave in strategic situations

5.Nash equilibrium– a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other factors have chosen

6.Dominant strategy– a strategy that is best for a player in a game regardless of the strategies chosen by the other players

7.Collusion– an agreement among firms in a market about quantities to produce or prices to charge

Review

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