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EC 260 > Lesson 2.4 > Flashcards

Lesson 2.4 Flashcards

1
Q

is being an oligopoly good and why?

A

yes, they generally have high profits

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2
Q

definition oligopoly

A

market with small number of firms

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3
Q

explain managers in oligopoly

A

considers reaction of rivals in pricing, managers are interdependent

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4
Q

3 reasons oligopolies can persist for years?

A

1) high entry barriers
2) government fiat
3) economies of scale

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5
Q

what is behaviour like in oligopoly

A

varies, more strategic

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6
Q

definition: cartel

A

when a collusive arrangement is made openly and formally

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7
Q

2 things cartels establish

A

1) uniform price for homogeneous product

2) distribution of sales across members

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8
Q

MC curve of cartel

A

If input prices do not increase as the cartel expands, the MC curve is horizontal summation of MC curves of individual firms

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9
Q

optimal price and output in oligopoly

A

choose quantity where MC curve cross MR to hit demand, go over to get price

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10
Q

what is price same as in oligopoly and what does it maximize?

A

Price is same as monopoly price. It maximizes profit earned by cartel

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11
Q

how do cartels allocate sales?

A

1) Cartel should allocate sales to members so MC of all members is equal (and in turn is equal to cartel MR). however sales are often allocated instead by levels of sales in past or extent of member’s productive capacity.

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12
Q

explain what should happen in allocation of sales in MC firm A > MC firm B

A

cartel can increase profit by transferring production from A to B, but unlikely to occur due to influence of members

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13
Q

what happens to demand curve if firms leave cartel?

A

demand curve shifts outward with price stable, demand curve becomes more elastic so firms can expand sales a lot with small reduction in price

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14
Q

when does profit increase for managers who leave cartel

A

If managers who leave cartel or secretly cheat, they would increase profit as long as rival managers do not do the same thing and cartel does not punish this behaviour

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15
Q

define price leadership

A

in oligopolistic industries, managers at one firm have significant market power and can set their price and rivals follow their lead

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16
Q

what market do small firms act as though they are in and what do managers act as?

A

Managers at the less dominant firms are price-takers. They act as if they are in a competitive market

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17
Q

supply curve for small firms

A

combined by horizontally summing their MC curve

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18
Q

formula for output and price of small firms

A

output where P = MC

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19
Q

demand curve for dominant firm

A

horizontal difference at each price between industry demand curve and supply curve for all small firms combined

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20
Q

output and price of dominant firm

A

total amount demanded - output supplied by small firms combined and price for dominant firm is where residual MR = MC

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21
Q

graph of output of small firm

A

total industry demand - output supplied by dominant firm

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22
Q

when is decision making simultaneous?

A

When firms produce identical products, and managers make their output decisions simultaneously without knowing decisions of others

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23
Q

what are managers who take action before others called?

A

first movers or market leaders

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24
Q

why do market leaders accelerate before others?

A

because of business acumen, they invent or patent a product or process, because they see opportunities others don’t, or because of luck

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25
Q

what does price competition result in?

A

Results in downward spiral of price cuts stopped only sometimes by constraint of MC

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26
Q

should managers do price competition and why/why not?

A

no, managers should never price below MC because then marginal revenue < marginal cost of the sale

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27
Q

market demand curve in collusion

A

cartel demand curve

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28
Q

cartel MC in collusion

A

horizontal summation of each firm’s MC curve

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29
Q

what market does cartel behave like?

A

monopoly

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30
Q

optimal price and output for cartel?

A

MC = MR

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31
Q

what happens in cournot scenario?

A

Competing on quantity (production capacity) to get higher profit relative to price

32
Q

4 assumptions of cournot

A

1) Rival managers move simultaneously
2) Same view of market demand
3) Estimate each other’s cost functions
4) Choose profit maximizing output conditional on rival output is fixed (solution identical to game theory)

33
Q

cournot - if firm A thinks firm B will abdicate market to them

A

Firm A should behave as monopolist and Set MR = MC and firm B produces 0

34
Q

cournot - firm A thinks B will produce x units - where does A produce?

A

Firm A produces at most market demand demand - firm B output

35
Q

cournot - firm A thinks B will produce x units - firm A demand curve

A

Firm A has a residual demand curve (market demand curve less what managers assume firm B produces)

36
Q

cournot - firm A thinks B will produce x units - what happens if P =< MC?

A

firm produces nothing

37
Q

definition: reaction function

A

a function that identifies for managers the profit-maximizing output to produce given output of rivals

38
Q

cournot - firm A thinks B will produce x units - only way mangers can optimize profit

A

The only way manager can maximize profit, is if they stay on reaction functions

39
Q

cournot - firm A thinks B will produce x units - profit compared to other competition

A

This profit is less than cartel but higher than if they compete on price

40
Q

explain cournot equilibrium

A

Cournot equilibrium occurs when 2 firm’s reaction functions intersect. Both firm’s expectations of what the other firm will produce is consistent with their own expectations of optimal output. Output is the same

41
Q

what happens if more than 2 entrants come into cournot situation

A

can bring significant price competition in the market, they erode market power of existing firms and generate downward pressure on price

42
Q

what happens in stackelberg behaviour?

A

Firm firm A chooses and commits to a capacity decision based on knowledge of rival’s reaction function, firm B needs to maximize their profit by following their reaction function.

43
Q

stackelberg - what happens if you have power to move first and what is this called?

A

your profit will be higher than in cournot. you have first-mover advantage.

44
Q

what is optimal strategy/behaviour in oligopoly?

A

depends on what adversary does

45
Q

stackelberg - which cost structure firm gains most by moving first?

A

low cost structure

46
Q

when is price competition a lose-lose situation?

A

if there is no differentiation between market products

47
Q

profit in price competition with no differentiation

A

0

48
Q

explain bertrand model

A

competing on price without it being lose-lose

49
Q

price firms charge in bertrand model and why?

A

Both firms charge same price because differentiation efforts create similar impacts on demand of others

50
Q

which generates higher profits: bertrand or collusion?

A

collusion

51
Q

entry of other competitors in bertrand?

A

reduces prices

52
Q

why are price sticky in cournot?

A

managers move firm toward optimum price and stay there so price is sticky

53
Q

where else are prices sticky besides cournot?

A

Prices are also sticky for markets with stable cost and demand, or where they are anticipated and where managers have been competing for several years

54
Q

sticky price with slightly differentiated product - demand curve of market

A

Demand curve of market is kinked at current market price

55
Q

sticky price with slightly differentiated product - demand curve with prices higher than current market price

A

demand is very elastic (but not perfectly because differentiated products are not perfect substitutes) because if 1 firm increases price, rival firms will not follow

56
Q

sticky price with slightly differentiated product - demand curve with prices less than current market price

A

demand is very inelastic since price cut made by one firm will be followed by rival firms so they can protect sales level

57
Q

at prices less than current market price, demand is inelastic, what does this make managers reluctant to do and why

A

This makes firms reluctant to reduce prices since rivals would follow and this would not increase sales

58
Q

what does kink in demand curve result in?

A

Kink in demand curve results in kink in MR. this means MC can rise or fall considerably before profit maximization conditions fall. This makes profit maximized price and quantity stable.

59
Q

optimal price and quantity with kinked demand curve

A

at kind in demand curve

60
Q

with bertrand model, how to find optimal price and quantity

A

find TR of one firm, differentiate TR with respect to Price of firm, set to 0 and solve for Price of firm. Do the same for other firm. This gives bertrand reaction functions for price of both firms. Substitute one in for the other to get optimal price. optimal quantity is the same for both firms too

61
Q

with cartel, how to find optimal price and quantity?

A

Q = qa + qb, then price is the same, so find dTR/dP and set to 0 to find Price.

62
Q

dominant firm, how to find optimal price and quantity with demand curve of small firm

A

1) demand curve for dominant firm = market demand curve - small firm demand curve; price is the same
2) find TR of dominant firm
3) find MR of dominant firm
4) set MR dominant firm = MC dominant firm to find Price

63
Q

dominant firm, how to find optimal price and quantity with TC of small firm

A

1) find MC of small firm
2) MC of small firm = P
3) rearrange for Q of small firm
4) multiply Q by number of small firms
5) demand of dominant firm = market demand - demand of small firms
6) set MR dominant firm = MC dominant firm

64
Q

remember how do we find MR?

A

dTR/dQ NOT dP

65
Q

in collusion, and 1 firm has higher MC, how much does each firm produce

A

firm with lower MC produces everything

66
Q

explain economies of scale

A

costs decrease as output expands

67
Q

what does it mean when cartel member cheats?

A

overproduce and thereby increase profit

68
Q

how to find reaction function of firm

A

set MC firm = P

69
Q

kink demand curve - changes in MC that do not move above or below vertical section of MR curve implication

A

do not cause optimal level of output or price to change

70
Q

price competition - highest and lowest price manager will accept

A

highest price is P = a - bQ (Q = q1+q2), highest price is a - 1. lowest price is c+1 where MC = c + q

71
Q

price competition - formula to solve

A

find P = a - bQ (set Q = q1 + q2) then set P = MC1 and solve for q1 and then do the same for q2

72
Q

perfectly competitive market, optimal price and output

A

choose P and Q where demand=supply (MC = demand)

73
Q

if 2 companies collude over compete, what can customers expect?

A

higher prices and lower quantities offered

74
Q

collusion - find max joint profts

A

Q*P - TC1 - TC2

75
Q

2 ways to solve for collusion

A

1) set Q = q/n in individual MC curve to get total MC

2) sum MCi, where it is solved for qi to get MC

76
Q

stackelberg - formula

A

firm A is first mover, then find firm B reaction function, substitute firm B reaction function into demand curve. next find MR and solve for firm A output

EC 260 (11 decks)

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