4. Oligopoly Flashcards
What are the two classic static models?
Cournot and Bertrand
Nash equilibrium
A pair of strategies such that neither firm can increase its profit by varying its output, given the output choice of the other firm
Best responses
The profit maximising choice of output for any output produced by the other firm
In a regular case if qj increases what happens to qi
qi decreases, MR(qi) decreases
How is market share illustrated?
qi/Q
When is the Cournot model used?
When quantity is set simultaneously
When is the bertrand model used?
When prices are chosen simultaneously
What is the outcome of the bertrand model?
Firms set p=mc and make no profits
When does the bertrand model result in profits?
When there are small capacity constraints such that (Ki
What is the outcome of the bertrand model when capacities equal cournot output?
Cournot prices are set. Each firm acts as a monopolist on their residual demand curve
Subgame perfect nash equilibrium
A strategy profile where no firm has a unilateral incentive to change its market strategy in any sub game of a larger game that is played over time
Complete contingency plan
A strategy specifies what a firm will do in any contingency that will require a decision
What is efficient rationing?
It maximises the number of goods sold, maximises producer surplus (profit) and there is a 1 to 1 trade off in produce and condumer surplus in this market
In the Bertrand model what does a higher t mean?
More product differentiation. Therefore the firms compete less and charge higher prices
What does the full hotelling model allow?
It allows firms to choose both price and locations in a two period game where firms choose locations first
How do we use backwards induction in the full hotelling model?
- solve for NE prices given location
- equilibrium locations will be decided while considering resultant NE prices
- solving in this way will deliver SPNE in locations and prices
Which firms does the dynamic Bertrand competition model with repetition apply to?
Those firms that provide services for non durable goods and compete for customers repeatedly
What is the outcome of the dynamic Bertrand competition with finite repetition?
There is no cooperation, both firms defect in all periods
What is the outcome of the dynamic Bertrand competition with infinite repetition?
Cooperation is possible as long as the discount rate is sufficiently high
How does the introduction of more firms effect the likelihood of cooperation in the Bertrand competition model with repetition?
The more firms there are the less likely cooperation is since the payoff from colluding is smaller
How does lag times in price changes effect the likelihood of cooperation in the Bertrand competition model with repetition?
The greater the lag time the higher the discount rate needs to be and the less likely cooperation will occur
When do we use stackelberg competition?
When firms compete over quantity sequentially
When is competition over quantity more likely to happen?
In the LR since in the SR firms have sticky or fixed production capacities
In Bertrand competition is there an advantage to moving first?
No
How do we solve stackelberg competition?
We solve for its SPNE by backwards induction, first solving for firm 2’s BR to q1 then finding q1
Which mover in stackelberg competition makes more profit?
The first mover
What is the incumbent firm?
The firm who moves first
What is required for an incumbent firm to keep out a potential entrant?
A fixed cost
What is a blockaded entry?
Occurs when the fixed cost is so high that any entry for firm 2 causes negative profit so firm 1 acts as a monopolist
What is accommodated entry?
When the profit for firm 1 of not allowing firm 2 to enter is smaller than it would be otherwise so they allow firm 2 to enter
What is incumbent predation?
Firm 1 commits to a quantity which fights off firm 2’s entry
