Imperfect competition

Question 1

Cournot model

Answer 1

• Oligopoly model in which each firm assumes that rivals will continue producing at their current output levels
• Derive reaction curve
• Equilibrium where reaction curves intersect

Question 2

Duopoly

Answer 2

A two-firm oligopoly

Question 3

Reaction function

Answer 3

A curve that shows the profit-maximizing level of output for one oligopolist for each amount supplied by another

Question 4

Bertrand model

Answer 4

• Firms produce identical product
• Each firm treats the price of its competitors as fixed in determining profit-maximizing output
• All firms set prices simultaneously
• Outcome: Set P = MC

Question 5

Stackelberg model

Answer 5

• Firms produce identical product
• One firm (Stackelberg leader) sets output before other firms (Stackelberg followers) do
• Leader chooses Q to maximise profit,
  given impact of its output on followers
• First-mover advantage
• Leader’s Q > followers’ Q

Question 6

Price rigidity

Answer 6

• Firms
  do not adjust prices even if costs and demand
  change
• Kinked demand curve model: Firm has kinked
  D at market price. More elastic higher P and less
  elastic lower P

Question 7

Price setting by a dominant firm en OPEC oil cartel

Answer 7

Leer bl 348

Question 8

Concentration indexes

Answer 8

• Concentration ratio (CR4 or CR5) - Add the market share of the n biggest firms (CR>90% = monopoly; 40%

Question 9

Monopolistic competition

Answer 9

Many firms that compete via differentiated products that are good substitutes

Free entry and exit

Question 10

Assumptions of the Chamberlin model

Answer 10

• A clearly defined industry group which consists of a large numbers of producers and products that are close, but imperfect, substitutes for one another
• Each firm expects its actions will go unnoticed by its rivals
• Demand and cost curves are the same for all firms in the industry

Question 11

Dominant strategy

Answer 11

The strategy in a game that produces better results, irrespectable of the strategy chosen by one’s opponent

Question 12

Nash Equilibrium

Answer 12

The combination of strategies in a game such that neither player has any incentive to change strategies given the strategy of the opponent

Question 13

Maximin strategy

Answer 13

Choosing the option that makes the lowest pay-off one can receive as large as possible

Question 14

Tit-for-tat strategiy

Answer 14

First round cooperate and then do what opponent did in the previous
interaction

Question 15

Sequencial games

Answer 15

One player moves first, and the other makes his choice with this knowledge

Question 16

Strategic entry deterrence

Answer 16

Change potential rivals’ profitability to enter

Question 17

Spatial interpretation of monopolistic competition

Answer 17

• Industries where location is important
• Airline Scheduling
• Paying for variety