AP Micro oligopoly game theory payoff matrix study guide
This study guide covers key concepts, terms, and examples related to oligopoly and game theory, focusing on payoff matrices that are crucial for AP Microeconomics exam preparation.
Quiz(32 questions)
1. What defines an oligopoly?
Terms in this Study Set(32)
Oligopoly Basics(16)
Define oligopoly.
An oligopoly is a market structure characterized by a few firms that dominate the market, selling similar or identical products.
True or False: Oligopolies have many firms competing.
False. Oligopolies consist of a small number of firms.
List two characteristics of oligopolies.
- Few large firms - Interdependent pricing
What is market power in an oligopoly?
Market power is the ability of firms to set prices above marginal cost due to limited competition.
Explain interdependence in oligopolies.
Firms must consider the actions of other firms when making pricing and output decisions.
What is a cartel?
A cartel is a formal agreement among firms in an oligopoly to coordinate prices and production to maximize profits.
Fill in the blank: Oligopolies can lead to _______ prices due to reduced competition.
higher
Compare perfect competition and oligopoly.
- Perfect competition: Many firms, price takers - Oligopoly: Few firms, price makers
What is a price war in oligopoly?
A price war occurs when firms reduce prices to outcompete rivals, potentially harming all firms involved.
True or False: Oligopolies always result in higher prices for consumers.
False. Prices can be lower or stabilized, depending on competition levels.
What is product differentiation in oligopolies?
Product differentiation refers to strategies used by firms to distinguish their products from competitors' offerings.
Give an example of an oligopoly market.
Automobile industry, smartphone market.
What is the significance of barriers to entry in oligopolies?
High barriers prevent new firms from entering the market, sustaining the oligopoly's market power.
Describe a dominant strategy in oligopoly game theory.
A dominant strategy is a choice that is optimal for a firm, regardless of what competitors do.
Fill in the blank: The kinked demand curve model explains ________ pricing behavior in oligopolies.
price rigidity
What role do mergers play in oligopolies?
Mergers can reduce competition by increasing market concentration, leading to higher prices and profits.
Game Theory and Payoff Matrices(16)
Define a payoff matrix.
A table that shows the payoffs each player receives for every possible strategy combination in a game.
True or False: In a dominant strategy, a player’s optimal choice is affected by what others do.
False. A dominant strategy is the best choice regardless of what other players choose.
What is Nash Equilibrium?
A situation where no player can benefit by changing their strategy while the strategies of others remain unchanged.
Fill in the blank: In an oligopoly, firms may avoid price competition through _____.
collusion.
Compare dominant and dominated strategies.
Dominant: best choice for a player. Dominated: worse than another strategy regardless of others' choices.
Example of a payoff matrix for two firms.
Firm A/B | Price High | Price Low Price High | (3,3) | (1,4) Price Low | (4,1) | (2,2)
What happens when firms in an oligopoly collude?
They can maximize joint profits, reduce competition, and typically lead to higher prices for consumers.
True or False: A mixed strategy is where a player randomizes over strategies.
True. Mixed strategies involve players choosing among strategies based on specific probabilities.
Define a zero-sum game.
A situation where one player's gain is exactly balanced by the losses of other players.
What is a best response?
The strategy that yields the highest payoff for a player given the other players' strategies.
Fill in the blank: In non-cooperative games, players _____.
make decisions independently.
Explain the Prisoner's Dilemma.
A scenario illustrating that two rational individuals may not cooperate even if it appears that cooperation is beneficial.
What is the purpose of a payoff matrix in game theory?
To visualize and analyze the outcomes of different strategy combinations and their respective payoffs.
Cause → Effect: If one firm lowers its price, what typically happens?
Competitors may also lower prices, leading to a price war.
List two key characteristics of oligopoly.
- Few sellers - Interdependent decision-making
What are the key components of a payoff matrix?
- Players: Typically firms in an oligopoly. - Strategies: Possible choices each player can make. - Payoffs: Outcomes based on the combination of strategies chosen, usually represented in a grid format.
Questions in this Study Set(32)
1. What defines an oligopoly?
2. What does a payoff matrix illustrate?
3. True or False: Oligopolies consist of many firms competing with identical products.
4. True or False: A Nash Equilibrium occurs when one player can unilaterally change their strategy to improve their payoff.
5. Which of the following is a characteristic of an oligopoly?
6. What is the outcome when firms in an oligopoly engage in collusion?
7. What does market power in an oligopoly allow firms to do?
8. Fill in the blank: A strategy that is always better than any other strategy, regardless of what opponents do, is called a _____.
9. Which scenario best illustrates interdependence in oligopolies?
10. Which of the following is NOT a characteristic of an oligopoly?
11. What is a cartel?
12. What is typically the best response of a firm if a competitor lowers their prices?
13. Fill in the blank: Oligopolies can lead to _______ prices due to strong market control.
14. True or False: A mixed strategy is where a player chooses a single strategy consistently.
15. In which way do oligopolies typically differ from perfect competition?
16. In game theory, what does the term 'zero-sum game' refer to?
17. What occurs during a price war in an oligopoly?
18. What is the purpose of defining a best response in game theory?
19. True or False: Oligopolies guarantee higher prices for consumers.
20. Which scenario best illustrates the Prisoner's Dilemma?
21. What is product differentiation in the context of oligopolies?
22. What typically happens to prices in an oligopoly when firms engage in price competition?
23. Which of the following is an example of an oligopolistic market?
24. Which strategy is considered dominated?
25. What significance do barriers to entry hold in oligopolistic markets?
26. What is one of the main reasons firms in an oligopoly might avoid price competition?
27. What is a dominant strategy in oligopoly game theory?
28. Which of the following best describes interdependent decision-making in an oligopoly?
29. Fill in the blank: The kinked demand curve model explains ________ stability in oligopolistic markets.
30. Fill in the blank: In non-cooperative games, players make decisions _____.
31. What effect do mergers have on oligopolistic markets?
32. In an oligopoly, what typically happens if one firm decides to increase its prices while others keep their prices constant?
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