Do online quiz at: http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html and send me the results!

1. Describe an oligopoly market.

A market structure in which only a few sellers offer similar or identical products
An oligopoly is a type of imperfect competition, meaning firms in these industries have competitors but at the same time do not face so much competition that they are price takers.
ex. market for tennis balls, world market for crude oil
A key feature of oligopoly is the tension between cooperation and self-interest. The group of oligopolists is best off cooperating and acting like a monopolist, producing a small quantity of output and charging a price above marginal cost. HOWEVER because each oligopolist cares about its own profit as well its hard for a group of firms to maintain the monopoly outcome.

2. What is a cartel and collusion

• cartel - a group of firms acting in unison. Once a cartel is formed the market is in effect served by a monopoly. That outcome maximizes the total profit that the producers can get from the market.
• collusion - an agreement among firms in a market about quantities to produce or prices to change
• ex. Jack and Jill get together and agree on the quantity of water to produce and the price to charge for it.

3. How is equilibrium achieved in an oligopoly?

• because of competition among the few firms in an oligopoly, they have to watch each other in deciding how to price their goods in order to compete with the others
• if one firm charges higher than the others, it will lose profits and vice versa
• so all firms eventually end up with similar prices in order to collaborate, reaching a price equilibrium

4. What is the Nash Equilibrium?
   • A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen.
     

5. Describe how the size of an oligopoly can affect market outcomes.

6. Summarize the OPEC and World Oil Market example on pg. 357

• world's oil is produced by a few countries, mainly in the Middle East, that form an oligopoly
• formed a cartel, OPEC (Organization of Petroleum Exporting Countries) that controls 3/4 of the world's oil
• OPEC tries to set production levels - increase price through coordination to decrease quantity produced (high price is ideal)
• some members choose to "cheat" by agreeing to decrease production but instead increase to get a larger portion of the total profit
• this causes the oligopoly to become ineffective b/c of lack of cooperation/arguments
• success depends on how well its members cooperate

7. Define Game Theory

Game theory is the study of how people behave in strategic situations, in which
they must consider others' responses to their own actions

8. How is game theory relevant to oligopoly?

Because the number of firms in an oligopoly is very small, each firm must
take into account the reactions other firms will have to their own actions.

9. Summarize the other examples of the prisoners dilemma pg. 361-362.

• Arms Races: Each country prefers to have more arms than the other because a larger Arsenal gives it more influence in the world affairs. But, each country prefers to live in a world safe from the other country's weapons.
• Advertising: Deciding wether to advertise between two companies: If neither advertises, the two split market. If both advertise, they again split markets, but profits are lower since they must now pay for advertising. However, if only one advertises, it attracts customers from the other brand.
• Common Resources: This views the dillema into companies having to decide how many natural resource to obtain and negate the other company. Basically shows the self interest of both leads them to inferior outcome.
  

10. Why do people sometimes cooperate?

Cooperation can make everyone better off. The "prisoner's dilelamma" states that while cooperation between the two prisoners is difficult to maintain, it is mutually beneficial.

I.e. In the game we played in class, you could work together and make a constant profit instead of risking a huge loss for the sake of a larger profit

11. How does the government regulate oligopolies and why? Anti-trust laws

• i.e. Sherman Antitrust Act of 1890 condemned criminal conspriacy amongst oligopolists
• Clayton Act of 1914 encouraged parties to sue oligopolists, and they could win up to 3 times the cost of their sustained damages
  
• US Justice Department and private parties can file legal suits to enforce anti-trust laws
• laws meant to prevent oligopolists from working together in ways that could harm the public, and also meant to keep the markets competitive
  

12. Do question 5 on pg. 373.\

• a. Dominant Strategy:
• Mexico Low Tariff --- US High Tariff gain is greater
• Mexico High Tariff --- US High tariff gain is greater
• this means that the US has a dominant strategy for high tariff
• US Low Tariff --- Mexico High Tariff gain is greater
• US High Tariff --- Mexico High tariff gain is greater
• this means that the Mexico has a dominant strategy for high tariff
• b. Nash Equilibrium: A situation in which "economic actors" interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
• because both Mexico and the US' dominant strategies are high, there is a Nash Equilibrium for high
• c.
• d.