chapter 10 - oligopoly

Question 1

what is an oligopoly?

Answer 1

a market structure in between perfect competition and monopoly with only a few producers (high FC = barrier to entry) that want to maximize their profit. they consider how other firm’s actions affect their own

Question 2

the nb of firms in a oligopoly indicates…

Answer 2

the nb of firms is a good indication of whether the market is closer to monopoly (small nb of firms) or perfect competition (many firms)

Question 3

market shares are a measure of?

Answer 3

market power

Question 4

antitrust refers to…

Answer 4

laws to enforce free competition in markets: eliminate barriers to entry

Question 5

the market shares of every firms in a market = ?

Answer 5

= 100

Question 6

how to compute market share?

Answer 6

sales from firm/total sales in the market

Question 7

what does the herfindahl index measures?

Answer 7

it measure the degree of competitiveness in the market (the market concentration): if HHi close to 0 = very competitive market

Question 8

what does a H close to zero tells us?

Answer 8

minimum concentration = perfect competition

Question 9

what does a H close to 10000 tells us?

Answer 9

maximum concentration = monopoly

Question 10

what is the H if their is one monopoly is the market?

Answer 10

H = 100^2 = 10 000

Question 11

what value of H indicates that a market is considered an oligopoly?

Answer 11

H > 1000 = oligopoly

Question 12

what value of H considers a market as highly concentrated?

Answer 12

H > 1800 = highly concentrated

Question 13

what are the characteristics of the cournot model?

Answer 13

• N firms competing on a market
• same homogeneous product
• firms choose output at the same time
• unique market P determined by demand
• demand = output of all firms
• strategic interaction
• Nash Equilibrium

Question 14

what is the definition of N.E under cournot model?

Answer 14

in the NE of the cournot duopoly model, firms correctly anticipate the output decision of the other firm and choose the best response to the output of the other firm

Question 15

what is different between the cournot and stackelberg model?

Answer 15

same strategic configuration as in cournot model. but firm #1 moves first (1st mover/leader advantage)

Question 16

The profits of the leader in a Stackelberg duopoly are…

Answer 16

• are greater than those of the follower

- are greater than those of a Cournot duopolist

Question 17

how is the total profit under stackelberg compared to the total profit under cournot?

Answer 17

lower total profit under stackelberg

Question 18

The profits of the follower in a Stackelberg duopoly are…

Answer 18

• are smaller than those of the follower

- are smaller than those of a Cournot duopolist

Question 19

what can we say about the output under Stackelberg and Cournot?

Answer 19

under stackelberg, 1st mover produces more than in the cournot model, but the follower produces less

Question 20

which market model (stackelberg and cournot) is more competitive and why?

Answer 20

stackelberg is more competitive because compared to cournot,

• bigger total output
• lower price
• lower total profits

Question 21

compare Q between market structures

Answer 21

perfect comp > stackelberg > cournot > monopoly

Question 22

compare P between market structures

Answer 22

perfect comp < stackelberg < cournot < monopoly

Question 23

compare profit between market structures

Answer 23

perfect comp < stackelberg < cournot < monopoly

Question 24

compare W between market structures

Answer 24

perfect comp > stackelberg > cournot > monopoly

Question 25

what is a difficulty of collusive strategy? and what can help?

Answer 25

difficulty to maintain incentives to cooperate. repeated interaction can help = build reputation and trust

Question 26

what happens when someone cheats under tacit collusion?

Answer 26

back to the nash equilibrium, end of cooperation

Question 27

what is the limit of tacit collusion?

Answer 27

firms need to trade off the potential increase in profits today against the potential loss of profits in the future

Question 28

what is a cartel and when does it happen?

Answer 28

when tacit collusion is not possible, firms may try to cooperate by discussing how to organize collusion: P and Q are discussed and market shares are decided which can increase their profit

Question 29

what actions are taken against cartels?

Answer 29

they are illegal so antitrust laws and competition policies make sure competition is preserved