chapter 22: oligopoly

Question 1

oligopoly

Answer 1

is a market structure in which only a few sellers offer similar or identical products.

Question 2

In oligopolistic markets

Answer 2

there might be many firms, but sales are dominated by a small number of firms.

Question 3

Oligopolistic firms are interdependent meaning…

Answer 3

• The actions of any one seller in the market can have a large impact on the profits of all the other sellers.
• Firms also consider actions and reactions of rivals.

Question 4

duopoly

Answer 4

2 firms selling an identical product.

Question 5

Isoprofit lines

Answer 5

depict all combinations of y1 and y2 that yield a constant level of profits for firm 2

Question 6

Price leadership

Answer 6

Instead of setting quantity, the leader may instead set price.
In equilibrium, both firms must charge the same price, because they are selling identical products.

Question 7

Simultaneous quantity setting: The Cournot model

Answer 7

Two firms simultaneously decide what quantity to produce. Each firm has to
forecast the other firm’s output choice.

Question 8

In a Cournot equilibrium

Answer 8

(y1^,y2^ ), each firm is maximizing its profits and produces an output that the other firm expects to produce.

The Cournot equilibrium is the pair of outputs at which the two reaction curves
cross.

Question 9

Simultaneous price setting: Bertrand competition

Answer 9

In the Bertrand model, firms simultaneously set their prices and let the market determine the quantity sold.
A Bertrand equilibrium is a set of prices (p∗1, p∗2 ) such that each price is a profit-maximizing choice given the choice made by the other firms.

Question 10

When firms are selling identical products, the Bertrand equilibrium is the
competitive equilibrium where price equals marginal cost. what happens?

Answer 10

• If one firm sets a price above marginal cost, the other firm has an incentive
  to set a price slightly below this price to capture the whole market.
• Any price below or above marginal cost cannot be an equilibrium.

Question 11

Collusion

Answer 11

If collusion is possible, firms can form a cartel and choose the output that
maximizes total industry profits and divide the profits among themselves.

Both firms have an incentive to break the cartel and increase their profits by
increasing their own production

Question 12

Punishment strategies (def?)

Answer 12

A cartel is unstable because it is always in the interest of each of the firms to
increase their production.
Punishment strategies can help to stabilize the cartel.

Question 13

Punishment strategies (which strategies?)

Answer 13

• Each firm agrees to produce half of the monopoly output and gets profit
  πm.
• A firm can break the agreement and produce more to get profit πd > πm.
• If one firm breaks the agreement, the other firm will respond by increasing
  its output and they will produce the Cournot output forever and obtain
  πc < πm.

Question 14

PV cheating (cartel)

Answer 14

If a firm produces more than the cartel amount, it gets a one-time benefit of
profits πd , but then has to live with the breakup of the cartel and the reversion
to Cournot behavior

Question 14

PV cheating (cartel)

Answer 14

If a firm produces more than the cartel amount, it gets a one-time benefit of
profits πd , but then has to live with the breakup of the cartel and the reversion
to Cournot behavior