lesson 11 - monopolistic comp and oligopoly

Question 1

Perfect Comp

Answer 1

• many small firms
• identical homogenous products
• price takers
  -free entry and exit
  eg- agricultural commodities, electronic components

Question 2

monopoly

Answer 2

-single firm
-unique product
-price maker
-barriers to entry and exit of firms
eg- patented pharmaceuticals, microsoft windows

Question 3

2 ways market can show some degree of market power

Answer 3

1. products are similiar but not perfect substitutes (eg cars)
2. only a few firms in the market (eg - search engine)

Question 4

Monopolistic comp

Answer 4

• few firms
• differentiated product(close substitutes)
• relatively easy entry and exit
  eg - clothing stores, toothpaste brands, restaurants

Question 5

key chracteristics

Answer 5

1. product differentiation
2. free entry and exit

Question 6

long run in monopolistic comp

Answer 6

• economic profits are zero
• P=AC
• profits = 0, still there is economic inefficiency as P>MC.
  firms are not producing at the min point on their AC curve
• results in deadweight loss

Question 7

short run in monopolistic comp

Answer 7

P>Mc
earn positive profits

Question 8

Oligopoly

Answer 8

• few firms
• interdependence
• bariiers to entry
  eg- airlines, automobile

Question 9

cournot

Answer 9

• compete on quantity
• simaltaneous decisions
• nash eq

Question 10

bertrand

Answer 10

• compete on price
• simultaneous decisions
• nash eq at P=MC (acts as PC, since firms are in price war, and will ultimately charge P=MC)
• Even with only two firms, price competition in the Bertrand model drives prices down to marginal cost, resulting in zero economic profits.

Question 11

reaction function

Answer 11

shows a firms optimal qty choice given a competitors qty choice (cournot) or price choice (bertrand)
Solving for the equilibrium involves finding the intersection of the reaction functions.

Question 12

cartel

Answer 12

firms collude to act like a monopoly, maximising joint profits
acts like a monopoly

Question 13

bisection rule - for monopoly and perfect competition

Answer 13

in a linear demand model with constant MC, the distance from the vertical axis to the monopoly quantity is half the distance from the axis to the perfectly competitive qty

Question 14

how to solve cournot

Answer 14

A reaction function shows firm i’s profit-maximizing quantity (Qᵢ) as a function of the other firms’ quantities (Q₋ᵢ). To find it, set MRᵢ = MCᵢ and solve for Qᵢ in terms of Q₋ᵢ.

it’s found by solving the system of reaction functions simultaneously. This gives you the equilibrium quantities for each firm (Qᵢ, Qⱼ,…). Substitute these into the inverse demand function to find the equilibrium price (P*).

Question 15

How is the equilibrium quantity and price determined for a cartel?

Answer 15

The cartel acts as a monopolist. It restricts output to the monopoly level where MR = MC (for the entire cartel). The monopoly price is then found by substituting this quantity into the inverse demand function. The cartel must then decide how to allocate production among its members.

Question 16

steps for solving cournot

Answer 16

Write the inverse demand function (P = a - bQ). 2. Write the total revenue function for each firm (TRᵢ = P * Qᵢ). 3. Calculate marginal revenue for each firm (MRᵢ = dTRᵢ/dQᵢ). 4. Set MRᵢ = MCᵢ for each firm. 5. Solve the resulting system of two equations (the reaction functions) simultaneously to find the equilibrium quantities (Qᵢ, Qⱼ). 6. Substitute Qᵢ* and Qⱼ* into the inverse demand function to obtain the equilibrium price (P*). 7. Calculate each firm’s profits (πᵢ = TRᵢ - TCᵢ).