MT7: Market Structure 1 Flashcards
Framework market entry
Simplest Setup exogenous sunk costs
Case A: Bertrand
Simplest Setup exogenous sunk costs
Case B: Cournot
Simplest Setup exogenous sunk costs
Case B: p = monopoly price
Can be modelled by replacing the final stage by an infinite horizon
Introduce a modification to the market demand function in the form of a cutoff point
Simplest Setup exogenous sunk costs
Overview / picture of the 3 cases
Central Q: As market size (s) rises, how does n vary?
Implication of market competition
A rise in the toughness in price competition leads to a higher level of concentration (fewer firms)
Intuition: Less likely to enter a market when price comp is very though because not so profitable
Definition Thoughness of price comp
the thoughness of price comp relates to the funtional relationship between the equil. price and the number of firms (c1, Ck) in the market
Second feature of the simple model
Convergence theorem
As market size S incr. the level of concentration converges to 0 in the limit
Key property of the endogenous sunk cost model
as S rises, N rises indifenetily, c-> lim 0
we have a fragmented market (many firms with low market share)
Extension: Horizontal product differentiation (still endogenous sunk costs)
Implication of the horizontal prod diff model for both exogenous sunk cost model and endogenous sunk cost model
Multiple equilibria are endemic, i.e. they are an intrinsic feature of the model
Far reaching implication: Any general results on concentration will take the form of a lower bound restriction on the set of equil outcomes
Develop the Cournot model with quality: Intro
Develop the Cournot model with quality: calculation
Cournot model with quality: Picture
Cournot model with quality: Interpretation
