LEctures 8 and 9

Question 1

Nash Equibilibrium

Answer 1

Strategies (S1, S2) are a Nash equilibrium if S2 is a best response to S1 and S1 is a best response to s2

Question 2

Strategic Substitutes

Answer 2

Best response function decreasing in other’s persons choice
S1BR(s2) decreasing in S2
S2BR(S1) decreasing in S1

Question 3

Strategic Complements:

Answer 3

Best Response function increasing other person’s choice

S1BR(s2) increasing in S2
S2Br(s1) increasing in s1

Question 4

Cournot

Answer 4

Strategic substitues

q2 increases implies q1BR decreases

Question 5

Bertrand

Answer 5

Strategic complements

p2 increases implies that p1 BR increase

Question 6

Competition is more intense when strategic complements

Answer 6

x

Question 7

What is the socially optimal number of entrants?

Answer 7

Socially optimal number of entrants is the number that maximize consumer + producer surplus - entry costs

Question 8

Low entry Cost in Cournot

Answer 8

There is excessive entry. The optimal number of firms is smaller than the number that actually enter.
Reason is business stealing. When an additional firm enters the market, the sales of the existing firms decline. However, the new entrant does not take this into account.

Question 9

High Entry Cost

Answer 9

There is too little entry
The optimal number of firms is larger than the number that actually enter
Reason: lack of competition: when a firm decides whether to enter the market it does not internalize the benefits to consumers from increased competition (externality)