Chapter 13 (Week 7) Flashcards
Monopolistic competition
a market structure in which firms have market power but no additional firm can enter and earn positive profits. The two characteristics are
Product differentiation: firms supply products that are similar but not exactly the same. So the XEDs are large but not infinite
Free entry and exit: this means that there are no (or relatively low) barriers to entry and/or exit. This means that it is likely that there are many firms in the market
Demand curve in a monopolistically competitive market
Downward sloping, so the 0 profit point is to the left of the minimum AC
Oligopoly
a market with a small number of firms and with barriers to entry.
Kinked demand curve model
Oligopoly model in which each firm faces a demand curve kinked at the currently prevailing price: at higher prices, demand is very elastic, whereas at lower prices it is inelastic
Nash equilibrium
set of strategies of actions in which each firm does the best it can, given its competitors’ actions.
Duopoly
market in which only 2 firms compete with each other
Cournot model
is an oligopoly model in which firms produce homogeneous goods, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce
Cournot equilibrium
is the equilibrium in the Cournot model in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly
a set of quantities chosen by firms such that holding the quantities of all other firms constant no firm can obtain a higher profit by choosing a different quantity
Best response curve (reaction curve)
The relationship between a firm’s profit-maximising output and the amount it thinks its competitor will produce
Find Cournot Duopoly equilibrium quantities
- Total revenue and TC of both firms
- Use first order derivatives to find MR and MC
- MR = MC –> best response functions
- Substitute one firm’s best response function into the other
Bertrand equilibrium
If MCs of the two firms contain the other firm
1. Price = MC inverse demand function equals MC function
2. Solve the equation
3. Substitute one into the other
Cartel
group of firms that explicitly agree to coordinate their activities.
Illegal in most countries
Raises profits for the firms in general
Firms involved may face fines, and their owners or managers may face individual fines or jail terms.
A cartel forms if members of the cartel believe they can raise their profits by coordinating their actions.
Finding Cartel (collusion) equilibrium
- Find MC = MR and solve for Total Q
- Divide Q by the number of firms to find individual quantities
Prisoners’ Dilemma
game theory in which 2 prisoners must decide separately whether to confess a crime. If a prisoner confesses, he will receive a lighter sentence and his accomplice will receive a heavier one. But, if neither confesses, sentences will be lighter than if both confess
Price rigidity
characteristic of oligopoly markets in which firms are reluctant to change prices afraid that their competitors may not raise theirs
Basis of the kinked demand curve model of oligopoly
Price signalling
form of implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit
Price leadership
pattern of pricing in which one firm regularly announces price changes that other firms then match
Why do cartels fail
Not enough market power
Incentives to cheat
Non cooperative oligpoly
All firms are identical produce undifferentiated products
Model for duopoly markets last just one period
