Module 13.3: Oligopoly Flashcards
What are the 3 key differences between monopolistic competition and Oligopoly?
1) Higher barriers to entry
2) fewer firms
3) firms are interdependent, so a price change by one firm can be expected to be met by price change from competitors.
what is the kinked demand curve?
based on the assumption that an increase in a firm’s product price will not be followed by its competitors, but a decrease in price will. Therefore, each firm believes that it faces a demand curve that is more elastic above a given price than it is below the given price.
Where is the firms profit maximizing price in the kinked demand curve?
At the price that causes the kink.
What is the limitations of the kinked demand curve?
the price where the kink will occur is out of the scope of the model.
What is the Cournot model?
Considers an oligopoly with only 2 firms and both have identical and constant marginal costs of production. firms assume what the other firm will supply next period, and subtract this quantity from the market demand curve, the firm can construct a demand curve and marginal revenue curve.
Explain what happens with the Cournot model over time? What is the result?
Firms will keep adjusting their supply estimates and eventually will equal eachother. The resulting price is less than the profit maximizing price a monopolist would charge, but higher than marginal cost.
What is the Nash equilibrium?
Reached when the choices of all firms are such that there is no other choice that makes any firm better (increases profits or decreases losses)
What is the nash equillibrium in the prisoners dilemma?
to confess, both will get 2 years, although best outcome is both stay silent (6 months), it is not the nash equilibrium because both prisoners can improve their situation by confessing.
If two firms enter into a collusion agreement? describe what the nash equillibrium is?
both firms to cheat and get zero economic profits, although best case is that both honor the agreement (similar to prisoners dilemma).
What are factors of a collusive agreement for oligopolies to be more successful?
1) Fewer firms
2) More similar products
3) Similar cost structures
4) Pruchases are relatively small and infequent
5) more severe retaliation for cheating
6) less competition from outside the agreement.
What is the dominant firm model?
There is a single firm that has a significantly large market share because of its greater scale and lower cost structure. the market price is determined by this dominant firm.
When does the dominant firm maximize profits? when does competitive firms maximize profits under a dominant firm oligopoly?
dominant - producing to when marginal cost = marginal revenue
the quantity where marginal cost = profit maximizing price of the dominant firm.
What is the long run result in the dominant firm model when a competitive firm lowers the price?
Lead to a decrease in price of the dominant firm, and eventually decrease output of compeitive firms who will eventually leave the market.
At the end of the day, resulting price for ologopoy competition will be between what?
price based off of perfect collusion, and price that would result from perfect competition.
