Game Theory, Oligopoly and Market Failure: every key term you need (+ practice quiz)
25 flashcard terms for Intermediate Microeconomics Topic 8, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
A setting where each participant's best action depends on what others do. It is the defining feature of oligopoly and the reason simple optimisation must give way to game theory.
Normal form game
A description listing players, the strategies available to each and the payoff to every combination. It abstracts from timing and is the natural format for simultaneous decisions.
Dominant strategy
An action that is best regardless of what rivals choose. When one exists the analysis is easy, since no belief about opponents is needed to predict behaviour.
Dominated strategy
An action worse than some alternative against every rival choice. Iteratively deleting such actions often narrows the plausible outcomes without invoking equilibrium reasoning.
Best response function
The mapping from a rival's action to the action that maximises one's own payoff against it. Equilibrium is exactly the point where the best response functions intersect.
Nash equilibrium
A profile of strategies in which no player can gain by changing alone. It is a consistency condition on beliefs and actions rather than a claim that the outcome is good for anyone.
Mixed strategy
A randomisation over actions, used when no pure profile is stable. In equilibrium each player randomises so as to leave rivals exactly indifferent among the actions they are mixing.
Prisoners dilemma structure
A game where mutual cooperation beats mutual defection yet defecting dominates for each player. It captures why cartels are unstable and why individually rational choices can be collectively poor.
Repeated game
The same stage game played many times, allowing strategies conditioned on history. Punishment threats can then sustain cooperation that would be impossible in a single encounter.
Trigger strategy
A rule that cooperates until a rival defects and then punishes forever. It sustains collusion when the discounted value of future cooperation exceeds the one-time gain from cheating.
Sequential game
A game in which players move in a known order and observers see earlier moves. Its extensive form representation makes commitment and credibility central to the analysis.
Backward induction
Solving a sequential game from the final decisions back to the first. It eliminates plans that would not be carried out when the moment arrived, isolating credible behaviour.
Credible threat
A threatened action that the threatening party would actually want to take if called upon. Threats that fail this test are ignored, which is why commitment devices have value.
Cournot competition
Rivals choose quantities simultaneously and price clears the market. Output exceeds the monopoly level but falls short of the competitive level, and the gap narrows as firms are added.
Bertrand competition
Rivals set prices simultaneously with identical products, and undercutting drives price to marginal cost even with only two firms. The result shows how sharply the strategic variable matters.
Stackelberg leadership
One firm commits to a quantity first, anticipating the follower's best response. The leader gains by expanding, which shows that commitment can be worth more than flexibility.
Collusion and cartel instability
Joint profit is maximised at the monopoly quantity, but each member gains by quietly producing more. Detection lags and entry make sustained collusion fragile.
Product differentiation
Making a product distinct so rivals are imperfect substitutes. It softens price competition and gives each seller a downward-sloping demand curve of its own.
Monopolistic competition
Many firms selling differentiated products with free entry. Entry drives profit to zero at a tangency where price exceeds marginal cost and firms operate below minimum average cost.
Excess capacity result
In monopolistic competition the zero-profit tangency occurs on the falling part of average cost, so each firm could reduce unit cost by expanding. Variety is bought at the price of scale.
Externality
A cost or benefit falling on someone outside the transaction and not reflected in price. Because the decision maker ignores it, the market quantity diverges from the socially efficient one.
Pigouvian tax
A levy equal to the marginal external damage at the efficient quantity, which realigns private cost with social cost. The point is to correct the price signal rather than to raise revenue.
Coase reasoning
With well-defined property rights and negligible bargaining costs, the parties can negotiate to the efficient outcome whoever holds the right. Rights allocation then affects distribution, not efficiency.
Public good
A good that is non-rival in consumption and non-excludable. Efficiency requires summing willingness to pay vertically, and free riding means voluntary provision falls short.
Tragedy of the commons
Overuse of a rival but non-excludable resource, because each user ignores the congestion cost imposed on others. Quotas, fees or assigned rights are the standard remedies.