Imperfect Competition Flashcards
How do you use marginal pricing to find a competitive equilibrium in perfect competition ?
- Find the inverse demand function (because it shows price as a function of quantity)
- Find the marginal cost (c’q)
- Set P=MC
- Find the q
- Use q to find p
At this equilibrium, the profit = 0 (no improvement possible, so Pareto efficient)
How do you create the best response function in the Cournot duopoly ?
Step 1: Write the Market Demand Function
Step 2: Write the Profit Function for Each Firm
Step 3: Derive Firm 1’s Reaction to q2
Step 4: Derive Firm 2’s Best Response Symmetrically
Step 5: Solve the System of Best Response Functions
Get an equilibrium!
What is the key characteristic of firms in a perfectly competitive market?
Firms are price-takers, meaning they accept market prices as given and have no market power.
How does a monopolist determine the profit-maximizing level of output?
A monopolist maximizes profit by producing where marginal revenue (MR) equals marginal cost (MC).
What is the relationship between elasticity and pricing in a monopoly?
In the case of elastic demand, a monopolist lowers prices to increase revenue, while inelastic demand allows the monopolist to raise prices and increase revenue.
What is deadweight loss in a monopoly?
Deadweight loss occurs because monopolies produce less than the socially optimal quantity, leading to inefficiency in the market.
What is price discrimination in a monopoly?
Price discrimination is when a monopolist charges different prices to different consumers for the same product, based on factors like willingness to pay.
What are the three degrees of price discrimination?
First-degree (perfect): Personalized pricing for each customer.
Second-degree: Pricing based on quantity purchased (e.g., bulk discounts).
Third-degree: Prices based on identifiable characteristics (e.g., age or location).
What is the key feature of a Cournot duopoly?
In a Cournot duopoly, two firms simultaneously choose their output quantities, considering the competitor’s output.
How does Cournot competition compare to monopoly in terms of output and profits?
Total output is higher in Cournot competition than in a monopoly, but it is still less than in perfect competition. Firms’ profits are also lower than in a monopoly.
What happens as the number of firms increases in Cournot competition?
As the number of firms increases, Cournot competition converges toward perfect competition, where each firm behaves like a price-taker.
What is the key characteristic of a Bertrand duopoly?
In a Bertrand duopoly, two firms choose their prices simultaneously, with prices being driven down to marginal cost (P = MC) if the firms sell identical products.
What is the Bertrand paradox?
The Bertrand paradox states that even with only two firms, price competition leads to prices being driven to the level of marginal cost, resulting in zero profit for the firms.
How does product differentiation affect price competition in a Bertrand model?
When products are differentiated, price competition may not result in marginal cost pricing because firms can maintain higher prices based on differences in product attributes or costs.
What is collusion in an oligopoly, and why do firms engage in it?
Collusion occurs when firms cooperate to set prices or output to maximize their joint profits, which can result in higher profits than competition, similar to a monopoly.
