Final Exam - Chapter 11

Question 1

imperfect competition

Answer 1

market structures that have characteristics between those of perfect competition and monopoly

Question 2

oligopoly

Answer 2

competition among a small number of firms (ex: airline industry)

Question 3

duopoly

Answer 3

competition between 2 firms (ex: Google v Apple)

Question 4

collusion

Answer 4

economic behavior where all the firms in an oligopoly coordinate production decisions to collectively act as a monopoly and split profits amongst themselves

Question 5

cartel

Answer 5

organization formed as a result of collusion

Question 6

reaction curve / best response function

Answer 6

function that related to a firm’s best response to its competitor’s possible actions

Question 7

nash equilibrium

Answer 7

equilibrium where each firm is doing the best it can in response to the actions taken by competitors with no profitable deviation

Question 8

Cournot competition

Answer 8

oligopoly model where each firm chooses production quantity at the same time (q). The firms sell identical products and face the same market price.

Question 9

profitable deviation

Answer 9

when a firm decides to change their behavior from what’s expected/agreed upon, because they find it will make them better off financially (i.e. no nash)

Question 10

stackelberg model

Answer 10

oligopoly model where firms make production decisions one after the other (sequentially) - both firms have identical products and same market price but do NOT choose quantity at the same time

Question 11

first mover advantage

Answer 11

advantage gained by the initial firm in setting its production quantity first in the stackelberg

Question 12

Bertrand model

Answer 12

an oligopoly model where each firm chooses the price of their product. the products are identical and prices are set at the same time, but the price value differs and consumers buy whichever is cheapest. prices = MC, and firms can keep competing to lower costs and capture the entire customer base until p=MC. Once p=MC, the undercutting stops because there’s no profitable deviation. (if p<MC, profits are negative, but if p>MC, it’s too expensive and no one wants to buy –> 0 profits)