Unit 8: Monopolistic Competition, Oligopoly, and Game Theory
Markets between the two extremes, where firms compete on more than price and every decision has to guess what a rival will do next.
9 topics · 33 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Monopolistic Competition and Product Differentiation
- How it worksHow does a differentiated product give each firm in monopolistic competition its own small downward-sloping demand curve?
- How it worksHow does free entry and exit still discipline profits in monopolistic competition the way it does in perfect competition?
- Going furtherWhat happens to the number of firms in a monopolistically competitive market after a burst of new entry?
Your turn1 of 2
A dozen coffee shops sit on the same city block, each selling coffee that tastes and looks slightly different from its neighbors'. Because of this, each shop can raise its own price a little without losing every single customer. What does this describe?Excess Capacity and Markup Over Marginal Cost
- How it worksHow does a firm in long-run monopolistic-competition equilibrium end up pricing above marginal cost despite zero economic profit?
- Worked exampleFind the markup over marginal cost when a firm charges 5 dollars and marginal cost is 4 dollars at its chosen output.
- Common mistakeWhy doesn't zero economic profit in monopolistic competition mean price equals marginal cost the way it does in perfect competition?
Your turn1 of 2
Find the markup over marginal cost when a firm charges 12 dollars and marginal cost is 7 dollars at its chosen output.The Kinked Demand Curve and Price Rigidity
- How it worksHow does a rival matching every price cut but ignoring every price increase bend an oligopolist's demand curve at a kink?
- How it worksHow does that kink create a jump in marginal revenue that keeps the profit-maximizing price stuck in place?
- Going furtherWhat happens to price stickiness if rivals stop matching price cuts the way the kinked model assumes?
- Common mistakeWhy doesn't a small change in marginal cost always show up as a change in an oligopolist's price?
Your turn1 of 2
An oligopolist raises its price, and every rival ignores the increase, keeping their own prices the same. The oligopolist then considers cutting its price instead, and every rival immediately matches the cut. What shape does this give the oligopolist's perceived demand curve?Oligopoly and Strategic Interdependence
- How it worksHow does having only a few large firms make each one's best choice depend directly on what the others choose?
- How it worksHow does strategic interdependence separate oligopoly from both perfect competition and monopoly?
- Common mistakeWhy can't an oligopolist just set the same profit-maximizing price a monopolist would, ignoring its rivals entirely?
Your turn1 of 2
One airline cuts its fare from 236 to 163 dollars to undercut a rival. By how many dollars did the fare fall?Reading a Payoff Matrix
- How it worksHow do the rows, columns, and cells of a payoff matrix represent two players' strategies and outcomes?
- Worked exampleFind each firm's payoff when both charge a high price and earn 10 and 10, reading straight off a payoff matrix.
- Going furtherWhat happens to the payoffs in a matrix once one firm's cost of production changes?
Your turn1 of 2
In a payoff matrix, Firm A earns 12 dollars if it charges Low while its rival charges Low, and 25 dollars if it charges High while the rival still charges Low. How many more dollars does Firm A earn by charging High instead of Low against a Low rival?Dominant Strategies and Nash Equilibrium
- How it worksHow does a Nash equilibrium land on the pair of strategies where neither player wants to switch given the other's choice?
- Worked exampleFind the Nash equilibrium in a matrix where both firms earn 5 and 5 by cooperating but each earns 8 by cheating alone while the other earns 2.
- Common mistakeWhy isn't a Nash equilibrium necessarily the outcome that's best for both players combined?
- Going furtherWhat happens to the Nash equilibrium when one player's dominant strategy changes because a payoff shifts?
Your turn1 of 2
In a 2x2 game, both players earn 6 dollars each by cooperating, but a player who defects alone earns 12 dollars while the other earns only 3 dollars. How many more dollars does defecting alone earn compared to cooperating?The Prisoner's Dilemma
- How it worksHow does each suspect having a dominant strategy to confess trap both of them in a worse outcome than cooperating?
- Worked exampleFind the equilibrium outcome when staying silent earns both suspects 1 year but confessing alone earns 0 years against the other's 10.
- Going furtherWhat happens to the prisoner's dilemma outcome if the two suspects could make a binding promise beforehand?
- Ties togetherHow does the prisoner's dilemma explain why two firms in a cartel are each tempted to cheat on a price-fixing deal?
Your turn1 of 2
Two suspects who both stay silent each get 2 years in prison. A suspect who confesses alone goes free while the other gets 13 years. How many fewer years does confessing alone earn compared to staying silent together?Repeated Games and Cooperation
- How it worksHow does the threat of future retaliation change what a rational player does in a game that repeats indefinitely?
- How it worksHow does a tit-for-tat strategy punish cheating just long enough to make cooperation the smarter long-run choice?
- Going furtherWhat happens to cooperation once both players know the game is about to end for good?
- Ties togetherHow does repeated-game cooperation change the prisoner's dilemma outcome from what a single round predicts?
Your turn1 of 2
Two rival firms play a one-time pricing game and both end up cheating on any implicit deal to keep prices high, since cheating is each firm's dominant strategy. The same two firms instead expect to compete against each other for many years. What changes about their likely behavior?Mixed Strategies in Game Theory
- How it worksHow does randomizing between strategies become the only stable choice when no single pure strategy is a best response?
- How it worksHow does a mixed-strategy equilibrium set each player's probabilities to leave the other player exactly indifferent?
- Worked exampleFind the mixing probability for a kicker facing a keeper who stops left-kicks 80 percent of the time and right-kicks 40 percent of the time.
- Common mistakeWhy doesn't randomizing in a mixed strategy mean choosing an action arbitrarily with no calculation behind it?
- Going furtherWhat happens to a mixed-strategy equilibrium when one player's payoff from one action changes?
Your turn1 of 2
A kicker faces a keeper who stops left-kicks 81 percent of the time and stops right-kicks 43 percent of the time. By how many percentage points is the keeper more effective diving left than diving right?