oligopily and monopolistic competition Flashcards
what is a cartel
a collusion of firms to raise prices and therefore profits
why do cartels form
when colluding average profit is higher than if they act alone
why do cartels fail
-they are illegal and if discovered can face jail time or heavy financial penalties
-firms have incentive to cheat the cartel to gain extra profits
-dont control enough of the market
why do firms collude even if its illegal
-punishment is insignificant compared to the extra profits they will make
-firms can collude without explicitly saying they will collude
-tacit colllusion
why do firms merge
reduce costs, increase profits, control more of the market share
what is a cournot oligopily
simultaneous movement without collusion
what is a best response curve
firm a’s best response to the dominant strategy of B
what is a nash cournot equilibrium
where no firm can choose a different strategy or they will lose profit/utility
what is residual demand
the leftover demand in a market not produced by the existing firms
how do you find the nash cournot equilibrium for price
a+nm/n+1
how do you find the nash cournot equilibrium quantity
a-m/b(n+1)
if the firms are identical what will happens with production of the lower cost firm compared to the higher cost firm
the lower cost firm will produce more
what is the profit maximising point for a cournot oligopily
MR = P(1+1/ne) = MC
what are features specific to a stackelberg oligopily
there is a leader and a follower
what influences best response curves
costs
what advantage does the leader have
they get to set at their profit maximising point
how does the follower choose which point to produce at
chooses the best response curve to the leaders first move
how to find stackelberg leader quantity
a-m/2b
how to find stackelberg follower quantity
a-m/4b
what are featured of a bertrand oligopily
-firms set prices not quantity
-firms will undercut each other until they reach p=MC
what is the limitations of the bertrand model if the goods are homogeneuos
firms will not compete for no profit
it is insensitive to market demand and the number of firms in the market
why is the bertrand model better for markets where products are differentiated
because of consumer preferences if price of good B were to fall, the demand of A will not fall because people prefer good A
what are four features of monopolistic competition
price setters
free market entry
differentiated products
small market
if there is high fixes cost in a monopolisticly competitive market…
there are fewer number of firms
what happens to profits as the number of firms increases
lowers
