oligopoly Flashcards
what are the characteristics of an oligopoly
Few sellers & many buyers, Large barriers to entry, Product differentiation may or may not exist.
what are the consequences of an oligopoly
Strategic interactions matter
Interdependence between the sellers is an important characteristic
what is collusion?
two or more firms maximise profit and split it and together they act as a monopoly
why does collusion break down?
There is an incentive to cheat as to undercut the other firm will increase the individuals firms profits although decreasing the overall profits
how can cartels prevent cheating?
Detect cheating. Punish cheating. Repeated interactions may reduce cheating. It may be easier to maintain if the costs are the same. also repeat interactions will discourage cheating as long term profits may be greater without cheating
what are the assumptions of the bertrand model?
The assumption is that the sellers will buy from the supplier with the lowest price for homogenous products
what does the bertrand model predict?
If a firm A charges more then the other firm B then firm B will sell the whole market quantity and firm A will sell nothing. As a result, firm A will decrease its price below firm B in order to increase their sales. This will continue until the firm is selling at Pa=Pb=MC
what are the assumptions of the cournet model?
The assumptions are there is identical goods and decision is variable ie the firm can choose how much to sell. All goods sell for the same price and the market price is determined by the sum of the quantitys produced. The decisions are simultaneous
what is the nash equillibrium?
Nash equilibrium – the best response of a firm given the actions of its competitors
what is the relationship between the number of firms and the level of efficency?
the more firms there are the more efficent the market is
what is the effect on the market of more firms?
higher industry output, lower market price, and lower industry profit
what are the assumptions of the stackelberg model?
The goods the firms sell are identical. The firms compete in quantity (qA and qB). The firms select quantities sequentially. The firms sell goods at the same price. The leader chooses its quantity qL. The follower observes qL and chooses its quantity qF. firms aim to maximise profits
what does the cournet model suggests?
the cournet model suggests that the markets compete with quantity
what does the bertrand model suggest?
it suggests market compete with price
how do you derive the optimal quantity for the cournet model?
total market quantity is equal to Q1 + Q2 = Q, total revenue is equal to Qx P and total profit is equal to total revenue - costs. you then differentiate the total profit with respect to Q1 and also Q2 then you will have two formulas in terms of Q1 and Q2. the point at which these equations are equal to each other is the equilibrium quantity.
