05. Game Theory and Oligopoly Flashcards
What is the Prisoners Dilemma?
even if people or companies rationally follows their own self interest, best outcome is hard to reach when they cannot or dont cooperate
Collusion | Definition
a secret agreement or cooperation especially for an illegal or deceitful purpose
Price Leadership | Definition
one company changes its prices, and its competitors have to decide if they´re going to follow suit
What is the Cournot Model used for?
What is the basic idea?
1.
2.
3.
analyzing oligopolistic competition
in this model, firms compete on the amount of output that is produced and let the market determine the price
here, firms have homogenous good, identical costs, each firms treats outpur of competitor as fixed, and all firms decide simulatenously how much to produce
What is one feature of the Counot model?
firms decide on their output levels simultaneously without knowing the output level of the competitors
Whats the Cournot Equilibrium?
1.
2.
when both firms have no incentive to produce a different quantity of output
here each firm correctly assume show much competitor will produce
(profit higher than under perfect competition but less than if colluding)
What are reasons (natural barriers) for oligopolies to exist?
1.
2.
3.
- scale economies making it unprofitable for more than a few firms to coexist in the market
- patents or access to a technology may excluse potential competitors
- the need to spend money for name recognition and market reputation may discourage entry by new firms
Whats the Nash Bertrand Equilibrium?
1.
2.
3.
- a set of prices such that no firm can obtain a higher profit by choosing a different price if the other firms continue to charge these prices
- difference to nash cournot equilibrium: depends on whether firms produce identical or differentiated products
- firms price at MC and make no profit (even though their cost function may include a return on capital and remuneration of entrepreneurs)
What are ways to escape the Bertrand Paradoxon?
1.
2.
3.
- product differentiation
- repeated bertrand game
3. price signaling and price leadership
Cournot model vs Bertrand equilibrium | Characteristic comparison
- Quantity Setting?
- Price setting
- result/ equilibrium
- relevance
- C: simulatenously and independently | B: result of consumer choice
- C: determined by combination of production decisions of each firm | B: simultaenously and independently
- C: positive profits, price > MC | B: 0 profits, price = MC (when we have homogenous products)
- C: high, many markets | B: only relevant when differentiated products
What are the main types of product differentiation?
1.
2.
3.
4.
- physical product differentiation (size, design etc)
- marketing differentiation
- human capital differentiation (skill of employees, training level, uniforms)
- differentiation through distribution (eg. mail or internet shopping)
Monopolistic competition as a socially undesirable market structure | Should it be regulated?
1.
2.
no, because
- SMALL POWER
in most monopolistically competitive markets, monopoly power is small (DWL small, demand curves elastic, so AC close to minimum) - PRODUCT DIVERSITY
Any inefficiency must be balanced against an important benefit from monopolistic competition:
product diversity (valued by consumers; this willl outweigh the inefficiency costs resulting from downward sloping demand curves
What are the two characteristics of Monopolustically competitive markets?
- Firms compete by selling differentiated products that are highly substitutable for one another but
not perfect substitutes. In other words, the cross-price elasticities of demand are large but not
infinite. - There is free entry and exit: It is relatively easy for new firms to enter the market with their own
brands and for existing firms to leave if their products become unprofitable.
Suppose, FH Aachen is considering renting space in it’s building to one or two commercial grocery
stores. The rent FH Aachen can charge per square meter depends on the firm’s profit (excluding rent).
Which number of stores is better for FH Aachen in terms of rent? Which is better for students? Why?
- Profit
- students
- The monopoly will make more profit than the duopoly will, so the monopoly is willing to
pay FH Aachen more rent - Although granting monopoly rights may be attractive to FH Aachen in terms of higher rent, students will suffer (lose consumer surplus) because of the higher food prices.
What are the ways in which an oligopolistic market can be competitive?
1.
2.
In the Cournot model, it is an increase in the number of firms that leads to more vigorous
competition.
In the Bertrand model it is the degree of product differentiation.
As goods become more homogeneous, the market becomes more competitive, even with only
a small number of firms.
What are the four main characteristics of monopolistic competition?
1.
2.
3.
4.
- Number of buyers/sellers
- (Perfect) information
- Low entry and exit barriers
- Similar but differentiated goods
Which are factors that influence the type of oligopoly that forms?
1.
2.
3.
- Whether firms act sequentially or simultaneously.
- Whether firms set price or quantity.
- The type of demand curve the firms face.
Why do we assume in the simplest model of cournot that the firms have identical costs?
so we can ensure that output decisions are due to strategic interactions rather than cost differences
What are the main characteristics of oligopolys?
1.
2.
- only a few firms compete with one another and
- entry by new firms is impeded.
What are the strategic implications of monopolistically competitive markets?
1.
2.
3.
- Non-price decisions as important part of the environment of imperfect competition
- (in imperfectly competitive markets) development and implementation of an effective business strategy
- Strategy is important when firms are price makers and are faced with price and non-price competition as well as threats from new entrants into the market
Monopoly power and profitability in oligopolistic industries depend in part on how (1)
If the interaction is more cooperative than competitive, firms could (2)
- the firms interact
- charge prices far above costs and earn large profits.
- When a new firm enters a monopolistically competitive market or one firm introduces an improved product, the demand curve for each of the other firms…
- The introduction of a new product by a firm will…
- The amount of monopoly power by a firm depends on…
- …shifts inward, reducing the price and quantity
received by those incumbents. - …reduce the price received and quantity sold of
existing products. - …its success in differentiating its product from
those of other firms.
Does it influence the type of oligopoly that forms? Yes or No.
- whether firms act sequentially or simultaneuosly
- whether firms set price or qty
- the type of demand curve the firms face
- the time horizon over which firms will be in competition
- yes
- yes
- yes
- no
In a bertrand model with identical products price is…
…. equal to MC
(competition drives price down to MC; any P>MC would result in no sales)
If AC>p where MC=MR, firms will…
… earn negative profits and existing firms will leave.
In an oligopolistic market a firm sets price or output based partly on…
…strategic considerations regarding
the behavior of its competitors.
goods with high fixed cost of production may have aspects of (1) strategies. Firms may simply produce…(2)
- Quantity setting
- as a much as they can and then see what the market clearing price is.
