Sunday, November 9, 2014



Oligopoly - Video Jason welker
Oligopoly characteristics:
  • high barriers to entry
  • price making power
  • interdependence of firms
  • differentiated products
There have been by my count 5, yes, 5, years where oligopoly was an FRQ question. They were 2013, 2009, 2009B, 2007, 2007B. They are basically the same problem.

You are given a payoff matrix,

This matrix explains what the profits are depending on what each does. If LaPizza decides to advertise and PieCrust decides to advertise then they will both make a daily profit of $200 and $250 respectively.

You will be asked questions like:
  • What strategy should X company choose?
  • Who has the dominant strategy?
  • What is the daily profit.
  • If the two firms cooperate what will they do?
  • If the two firms act independently/simultaneously what will they choose?
  • If a subsidy/tax/new cost is added to a section of the matrix, draw a new matrix

Oligopoly AP Problems - for the love of Pete, make a chart.

Example - 1 - 2013
  • Pie Crust has a dominate strategy - no matter what the other firm does it will advertise.
  • La Pizza has no dominate strategy, what it does is dependent on what Pie Crust does.
  • Nash Equilibrium - Daily Profit - $450 & $300 - 

Example - 2 - 2009
  • Notice there is no dominate strategy, each should do the opposite of the other.
  • Cooperation leads to Blue going North & Red going South as they make more cash that way.

Example - 3 - 2007

  • Roadway has a dominate strategy because it should go early no matter what Rankin does.
  • Rankin has no dominate strategy, if Roadway chooses early it should choose early.
  • Daily Profit  for Rankin,,, go early.

mjmfoodie - oligopoly - video