Chapter 9 (Basic Oligopoly Models)

Question 1

Oligopoly

Answer 1

A market structure in which there are only a few firms, each of which is large relative to the total industry (typically between 2 and 10 firms).

Question 2

Sweezy oligopoly

Answer 2

An industry in which (1) there are few firms serving many consumers; (2) firms produce differentiated products; (3) each firm believes rivals will respond to a price reduction but will not follow a price increase; and (4) barriers to entry exist.

Question 3

Best-response (or reaction) function

Answer 3

A function that defines the profit-maximizing level of output for a firm for given output levels of another firm

Question 4

Cournot oligopoly

Answer 4

An industry in which (1) there are few firms serving many consumers; (2) firms produce either differentiated or homogeneous products; (3) each firm believes rivals will hold their output constant if it changes its output; and (4) barriers to entry exist.

Question 5

Cournot equilibrium

Answer 5

A situation in which neither firm has an incentive to change its output given the other firm’s output

Question 6

Isoprofit curve

Answer 6

A function that defines the combinations of outputs produced by all firms that yielded a given firm the same level of profits

Question 7

Stackelberg oligopoly

Answer 7

An industry in which (1) there are few firms serving many customers; (2) firms produce either differentiated or homogeneous products; (3) a single firm (the leader) chooses an output before rivals select their outputs; (4) all other firms (the followers) take the leader’s output as given and select outputs that maximize profits given the leader’s output; and (5) barriers to entry exist

Question 8

Bertrand oligopoly

Answer 8

An industry in which (1) there are few firms serving many consumers; (2) firms produce identical products at a constant marginal cost; (3) firms compete in price and react optimally to competitor’s prices; (4) consumers have perfect information and there are no transaction cost; and (5) barriers to entry exist.

Question 9

Contestable market

Answer 9

A market in which (1) all firms have access to the same technology; (2) consumers respond quickly to price changes; (3) existing firms cannot respond quickly to entry by lower their prices; and (4) there are no sunk costs

Question 10

Sunk cost

Answer 10

A cost that is forever lost after it has been paid