1. Oligopoly is derived from the Greek word “olig” meaning “a small number” or “a few.”  Characteristics of oligopoly Fewness of sellers Seller interdependence Feasibility of coordinated action among rival firms

2. þ If Kroger offers deep discounts on Pepsi, will Wal-Mart follow suit? þHow will MCI and AT&T react to the latest long distance marketing pitch by Sprint? þIf Gateway offers permits buyers to “trade-in” their old PC, what reaction might be expected from Micron, Dell, or Compaq? þNorthwest frequent flyer miles never “expire”--what does Delta do? Oligopolistic firms make strategic decisions (pricing, advertising, expansion) partly based on conjectures about the likely reaction of rival firms

3. This is useful for illustrating the principle of seller interdependence and also for analyzing the behavior of firms in tightly concentrated market structures

4. Ralph and Gertie have been charged with bank robbery. But without a confession, the DA can only get a “reckless endangerment” charge to stick. So the police play the ole’ “let’s make a deal game.”

5. OK, Gertie. Confess, rat on Ralph, and you avoid prison. But this deal may not last--we have made the same offer to Ralph!

6. Gertie’s Options Ralph’s Options Confess Don’t Confess 2, 20, 10 10, 0 6, 6

7. Confess is the dominant strategy, since it gives best best payoff irrespective of the strategy selected by the other player Defined as the strategy that yields the best result for each strategy selected by the other player

8.  Pizza Planet and Luigi’s are rivals in the market for home-delivered pizza. Each rival seeks to gain an advantage through advertising (product differentiation). Advertising is presumed NOT to affect market demand--only market share. Market share depends on the intensity of advertising relative to one’s rival.

9. Let P = $15 Q = 100 pizzas (market quantity-demanded) ATC (w/o advertising expense) = $5. Hence:  /Pizza = (TR - TC)/Q = ($1500 - $500)/100 = $10  Therefore, if neither seller advertises, each will sell 50 pizzas and earn a profit of $500. However, advertising could potentially increase sales to 75 pizzas.

10. Let P = $15 Q = 100 pizzas (market quantity-demanded) ATC (w/o advertising expense) = $5. Hence:  /Pizza = (TR - TC)/Q = ($1500 - $500)/100 = $10  Therefore, if neither seller advertises, each will sell 50 pizzas and earn a profit of $500. However, advertising could potentially increase sales to 75 pizzas.

11. Pizza and Luigi’s may select a “low” strategy (meaning a $100 outlay for advertising) or a “high” strategy ($200 outlay for advertising)

12. Pizza Planet’s Options Luigi’s Options High Low 400, 400150, 550 550, 150 300, 300 The dominant strategy is “High”