Midterm 2

Question 1

Baumol’s Contestable Markets (3 assumptions)

Answer 1

1. Entry is Free
2. Entry is absolute - if entrant were to charge price lower than incumbent, they would displace the incumbent
3. No sunk costs associated with entry

Question 2

Game Theory

7 things

Answer 2

1. Players
2. Actions
3. Information
4. Strategies
5. Payoffs
6. Outcomes
7. Equilibrium

Question 3

Zero Sum Game

Answer 3

• In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which each participant’s gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up and the total losses are subtracted, they will sum to zero

Question 4

Cournot Equilibrim

Answer 4

Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time

Question 5

Cournot Assumptions

Answer 5

There is more than one firm and all firms produce a homogeneous product, i.e. there is no product differentiation;

Firms do not cooperate, i.e. there is no collusion;

Firms have market power, i.e. each firm’s output decision affects the good’s price;

The number of firms is fixed;

Firms compete in quantities, and choose quantities simultaneously;

The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors’ decisions.

Question 6

Stackelberg Model

Answer 6

The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially.

Question 7

As you increase number of firms, the price drops closer to marginal cost (MC) - Formula

Answer 7

P(Y) [1-[1/(E(Y)/Si)]] = MC

Question 8

Bertrand Model Assumptions

Answer 8

1. Identical firms
2. Perfect Information
3. MC = 0
4. Homogeneous Products
5. Price is the decision variable

Question 9

Ways to avoid Bertrand Equilibrium (5)

Answer 9

1. Product Differentiation
2. Dynamic Competition
3. Coordinate Pricing
4. Punishment Strategies for undercutting
5. Capacity Constraints