Chapter 11

Question 1

What is imperfect competition?

Answer 1

The industry structure between perfect competition and monopoly.

Question 2

What is an oligopoly?

Answer 2

This is a market structure characterized by competition among a small number of firms

Question 3

What is monopolistic competition?

Answer 3

This is a type of imperfect competition where a large number of firms have some market power, but each firm makes zero economic profit in the long run.

Question 4

What does an equilibrium in an oligopoly mean?

Answer 4

In an oligopoly, each company’s actions determine what other companies want to do. Therefore, an equilibrium means that the market clears (supply =demand) and that no company wants to change ints behavior once it knows what others are doing.

Question 5

What is a nash-equilibrium?

Answer 5

Equilibrium in which each firm is doing its best conditional on the actions taken by the other firms.

Question 6

What is a prisoner’s dilemma?

Answer 6

A situation in which the Nash-equilibrium is an outcome that is worse for all involved than another (unstable) outcome.

Question 7

What is collusion?

Answer 7

This is economic behavior in which all firms in an oligopoly coordinate their production and pricing decisions to act as a monopoly together to gain monopoly profits to be shared among them. In this case, it should be trated as a monopoly.

Question 8

What is a cartel?

Answer 8

This is an organizatoin that is formed when firms collude

Question 9

What makes collusion unsustainable?

Answer 9

Firms will split the output in two, assuming they have equal costs. Each firm then has an incentive to produce more than agreed upon if they know the other company will restrict output.

Question 10

What makes collusion easier?

Answer 10

1. Way to detect and punish cheaters; transparency limits ability to cheat
2. Little difference in marginal costs between different members
3. Firms should take the long view and care more about the future; sacrifice short term opportunity costs for long term profits.

Question 11

What is Bertrand competition?

Answer 11

This is an oligopoly model in which each firm chooses the price of its products.

Question 12

What are the assumptions of the Bertrand model?

Answer 12

1. Firms sell identical products
2. Firms compete by choosing the price at which they sell products
3. Firms set their prices simultaneously

Question 13

What is a Cournot oligpoly?

Answer 13

This is an oligopoly model in which each firm chooses its production quantity.

Question 14

What are the assumptions of the Cournot model?

Answer 14

1. Firms sell identical goods
2. Firms compete by choosing a quantity to produce
3. All goods sell for the same price
4. Firms choose quantities simultaneously.

Question 15

What is the residual demand curve?

Answer 15

In Cournot competition, the demand remainng for a firm’s output gives the production quantities for its competitors.

Question 16

What is a residual marginal revenue curve?

Answer 16

A marginal revenue curve corresponding to residual demand curve (twice the slope of the demand curve)

Question 17

What is a reaction curve?

Answer 17

Function relating a firm’s best response to its competitor’s possible actions. In Cournot competition, this is the firm’s best production in response to its competitor’s possible quantity choices.

Question 18

What is a Stackelberg competition?

Answer 18

This is an oligopoly model in which firms make production decisions sequentially.

Question 19

What are the assumptions of the Stackelberg competition?

Answer 19

1. Firms sell identical products
2. Firms compete by choosing a quantity to produce
3. All goods sell for the same price (determined by total quantity produced)
4. Firms do not choose quantities simultaneously. One chooses Q first, then other company chooses Q etc.

Question 20

What is a first-mover advantage?

Answer 20

The advantage gained in a Stackelberg competition by the initial firm in setting its production quantity. They will produce more than in the Cournot model to increase their profits and reduce profits for other companies.