AP Microeconomics Flashcards: Oligopoly and Game Theory
Written by AP Content Team, Verified for 2026 AP Exams, Last updated: June 2026
Review key ideas with interactive flashcards. This set includes 19 cards to help you master important concepts.
What is an oligopoly?
An oligopoly is an inefficient market structure with high barriers to entry, where there are a few firms acting interdependently.
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What is an oligopoly?
An oligopoly is an inefficient market structure with high barriers to entry, where there are a few firms acting interdependently.
What are the key characteristics of an oligopoly?
The key characteristics are high barriers to entry, a few interdependent firms, and market inefficiency.
What is a Nash equilibrium?
A Nash equilibrium is a set of actions where no player can increase their payoff by unilaterally changing their action, given the other players' actions.
Why do firms in an oligopoly have an incentive to collude?
Firms in an oligopoly have an incentive to collude and form cartels to coordinate their actions, potentially leading to higher collective profits.
In a simple game, what two factors determine a player's payoff?
A player's payoff depends directly on the individual's own choice of action and the choices of the other players.
What does it mean for firms in an oligopoly to be 'interdependent'?
It means the payoff for each firm depends directly on both its own choices and the choices made by the other few firms in the market.
How do barriers to entry affect an oligopolistic market?
High barriers to entry prevent new firms from entering the market, which allows the few existing firms to maintain their market power and interdependence.
If two competing firms in an oligopoly form a cartel, what market outcome are they attempting to achieve?
They are attempting to achieve the monopoly outcome, which would allow them to collectively earn higher profits than if they competed.
What is a 'strategy' in the context of game theory?
A strategy is a complete plan of actions for playing a game.
How do oligopoly outcomes (price and quantity) compare to perfect competition?
Prices are generally higher and quantities are lower in an oligopoly than they would be with perfect competition.
What is a cartel?
A cartel is a group of firms in an oligopoly that have an incentive to collude and act together, often to control prices and output.
How would you calculate the minimum incentive required to persuade a player to change their dominant strategy?
One would calculate the payoff difference between the dominant strategy and the alternative; the incentive must be sufficient to make the alternative action yield a higher payoff.
How is a Nash equilibrium identified in a game matrix?
It is the set of actions where no player has an incentive to unilaterally take another action, because doing so would not increase their payoff.
In game theory, what is a 'game'?
A game is a situation where individuals take actions, and the payoff for each depends on both their own choice and the choices of others.
Why do oligopolists often fail to achieve the monopoly outcome?
Oligopolists have difficulty achieving the monopoly outcome for reasons similar to the Prisoner's Dilemma, where individual incentives can undermine a cooperative strategy.
What does the 'normal form model' of a game show?
The normal form model of a game, often a payoff matrix, shows the payoffs that result from each collection of strategies for every player.
What is a dominant strategy?
A player has a dominant strategy when the payoff to a particular action is always higher, independent of the action taken by the other player.
The difficulty oligopolists have in maintaining a cooperative, high-price strategy is similar to the outcome of what classic game theory model?
This difficulty is similar to that which prevents players from achieving a cooperative outcome in the Prisoner's Dilemma.
How does the outcome of a non-cooperative oligopoly compare to a monopoly?
While oligopolists may try to achieve the monopoly outcome, they often fail, resulting in quantities that are higher and prices that are lower than a pure monopoly.