EMI2- Oligopolies Flashcards
What are oligopolies often based on?
Strategic Interactions
What is the Cournot Model (1838)
Predicts how firms would behave in order to maximise profits
What do downwards sloping Best Response Functions result in?
Strategic Substitutes- ie if I know someone is going to change their output, I will change mine.
What does the Cournot model assume about the other firm’s output?
That it will remain fixed!
- How do we calculate profit for firm i in a duopoly.
- How do we maximise this profit?
- What does ci stand for?
- How we find the equation for a BRF line?
• πi= (a-bqi-bqj-ci)qi • ∂πi/∂πj= a-2bqi-qj-ci = 0 • ci stands for firm i's constant marginal cost • Put qj on the LHS ie qj=(a-2bqi-ci)/b
What is the best response function?
∂πi/∂πj= a-2bqi-qj-ci = 0
Remember qj is a constant!
What is Nash Equilibrium?
Nash equilibrium is a concept within game theory where the optimal outcome of a game is where there is no incentive to deviate from the initial strategy. More specifically, the Nash equilibrium is a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from their chosen strategy after considering an opponent’s choice.
How do you calculate it when there are n numbers of firms in an oligopoly?
MR=MC= P[1+1/n*PED]
What did Bertrant (1883) say?
Firms don’t set quantities like Cournot said- they in fact set prices
What does setting prices with perfect substitutes lead to ie the Bertrand Paradox?
Price falls down to marginal cost- the perfectly competitive outcome!
Why in reality don’t firms who set prices not quantities charge MC?
Because most things are imperfect substitutes, not imperfect substitutes.
What does product differentiation do?
Softens price competition as consumers may become attached to a particular brand?
What does Bertrand do about switching costs?
View 50:00 on lecture
What is SV 84 say?
If you have 2 firms in an industry and they set either Q or P, Bertrand will outperform Cournot in terms of welfare and prices but not in terms of profit
What did Hackner 2000 say?
Cournot could still have higher prices than Bertrand.
