7. Imperfect Competition Flashcards
What is an oligopoly with 2 firms called?
Duopoly
What are some assumptions that we use for these oligopolies?
- The market has 2 firms, and no other firms can enter.
- The firms set their quantities independently and simultaneously
- The firms have identical costs
- The firms sell identical products
What is the “Cournot” equilibrium?
A choice of quantity q for each firm, such as none of the firms have any reason to behave differently because no firm can obtain a higher profit by choosing a different action.
What is the profit maximization condition in the “Cournot” equilibrium?
MR = MC
What is this equation called?
This profit maximizing qa(qu) is called Best Response Function
If american produces 96, what would united produce and would they be happy with this?
-> if american produces 96, united produces 48…
so.. would they both be happy with this? united - yes!
however… american wont.. American will observe united producing 48, and they will then calculate the profit max quantity considering american produces 48, which would result in: qA = 96 - 0.5(48) = 72, so qA would decrease output from 96 to 72
-> this continues until they are operating at the Nash-Cournot equilirbrium
What happens in the “cournot oligopoly” if a firm chooses a quantity that is NOT the mutual best response?
If a firm chooses a quantity that is not the mutual best response, its profits will not be maximized.. and the firm should revise their decision
According to the cournot model, when would firms have no reason to make different decisions?
ONLY if both firms choose mutual best response no firms have reason to make different decisions/ actions.
Are the best response curves (cournot) oligpolies always the same (inverted)?
NO, only the case if MC is the SAME.
However.. MC can vary and in that case the best-response curves would be different..
