Chapter 8 - Oligopoly

Question 1

oligopolies

Answer 1

only a few competitors

Question 2

main difference between duopolies and monopolies+perfect competition

Answer 2

the interdependence between rival’s decision

Question 3

Bertrand model assumptions

Answer 3

Homogeneous products
Firms simultaneously set prices
No capacity constraints
Both firms have the same constant marginal cost

Question 4

since the duopolists’ products are (1), and since firms have no capacity constraints, it follows that whichever firm sets the (2) gets all of the demand

Answer 4

1. perfect substitutes

2. lowest price

Question 5

if the price set by firm 1 is lower than firm 2, then firm 1 gets the …

Answer 5

market demand D(p)

Question 6

if firm 1 and 2 set equal prices, then each firm receives…

Answer 6

one half of the market demand: 1/2 D(p)

Question 7

The discrete Bertrand game

Answer 7

no dominant strategy
Firm 1’s best response is to undercut firm 2 - unless firm 2 is already setting the lowest price. As a result, the Nash equilibrium corresponds to both firms setting the lowest price

Question 8

under price competition with homogeneous product and constant, symmetric marginal cost (Bertrand competition), firms price at the level of marginal cost

Question 9

Bertrand trap

Answer 9

as the number of competitors change from one to two, the equilibrium price changes from the monopoly price to the perfect competition price. 
two players (firms) reach a state of Nash equilibrium where both firms charge a price equal to marginal cost ("MC")

Question 10

avoiding the Bertrand trap

Answer 10

1. product differentiation - undercutting the rival’s price does not guarantee getting the total market demand
2. dynamic competition - prices are not set simultaneously in real life
3. asymmetric costs - both firms may not have the same marginal costs
4. capacity constraints - one firm may not be able to supply all the market

Question 11

price competition with different costs

Answer 11

the point where the two best responses cross is given by p2 = MC2 and p1 = MC2 - ϵ,
that is Firm 1 just undercuts Firm 2 (who prices at marginal cost) and gets all of the market demand
-> one way out of the Bertrand trap is to be a cost leader

Question 12

scenario: each firm is constrained by its capacity k

Answer 12

having a rival F2 price below F1, some of the demand will be stolen, specifically the capacity of F1
firms will set prices so that total demand equals the industry capacity
p = P (k1+k2)

Question 13

if capacities are relatively small, then the result obtains that total demand equals total capacity

Question 14

if total industry capacity is low in relation to market demand, then equilibrium prices are … than marginal cost

Answer 14

greater

Question 15

Cournot model assumptions

Answer 15

1. simultaneous output decisions
2. constant marginal costs
3. homogeneous product

Question 16

Cournot output decision

Answer 16

each firm chooses its quantity, taking as given the quantity of its rivals. The market price is then set at the level such that demand equals the total quantity produced by both firms.

Question 17

Marginal revenue is a line with…

Answer 17

twice the slope of d1(q2) and with the same vertical intercept

Question 18

under output competition (Cournot), equilibrium output is (1) than monopoly output and (2) than perfect competition output. Likewise the duopoly price is (3) than the monopoly price and (4) than the price under perfect competition

Answer 18

1. greater
2. lower
3. greater
4. lower

Question 19

Bertrand vs. Cournot

decision, predictions about price, adjustments, price, pass through rate

Answer 19

Question 20

if capacity and output can be easily adjusted, then the (1) is a better approximation of duopoly competition. If, by contrast, output and capacity are difficult to adjust, then the (2) is a good approximation of duopoly competition.

Answer 20

1. Bertrand model

2. Cournot model

Question 21

Counterfactual model

Answer 21

predict how the market will change as a function of changes in various exogenous conditions

Question 22

Comparative statistics

Answer 22

we compare two equilibria, with two sets of exogenous conditions, and predict how a shift in one variable will influence the other variables.

Question 23

Under Cournot competition, an increase in marginal cost implies a downward shift of the best response curve

Question 24

New technology and profits

Answer 24

the amount that Firm 1 should be willing to pay for new technology is the difference between its profits with lower marginal cost and its current profits

Question 25

Exchange rates and sales margin

Answer 25

when a foreign currency is devalued, the marginal cost of the foreign producer decreases, forcing the domestic producer to set its price equal to the new marginal cost, loosing profit