Oligopoly Flashcards
What are the conditions of a Cournot Oligopoly?
- Few firms serving many consumers
- Either differentiated or homogeneous products
- Firms choose quantity as the strategic variable, simultaneously
- Barriers to entry exist
What is a best response?
- The best response gives the profit-max level of output for a firm given the output levels of the rival’s
What is the form of a best response function?
- π1 = P{q1 + q2}q1 - C(q1)
How is a residual demand determined?
Given Firm1’s decided level of output, Firm2’s residual demand is same slope with Y-int at P where Firm1’s output quantity = market demand curve
What is a firm’s output decision as a best response to another firm, and what does this imply?
Firm acts as a monopolist on its residual D
Best response to a raise in quantity is a decrease in quantity
What does the slope of a best response function imply?
q1* decreases as q2 increases: Strategic substitutes
What is the best response to 0 output?
- If q2 = 0, firm 1 produces the industry monopoly output level
- R1 (0) = qm
In Cournot, when would a firm choose to produce 0 output?
- If q2 is so large that firm 1 expects p = MC (PERF COMP LEVEL) with q1 = 0, firm 1 would find it profit max to produce zero output
What is the profit/quantity relationship in Cournot?
- π1↑ as q1↑ (as q2↓)
What will determine the shape of the Cournot best response intersection?
- Given the same MC, the best response will be perfectly symmetric: on 45 degree line
What is the Nash Eqm of a Cournot game?
- The intersection of the two best-response functions is the Nash eqm to the Cournot game
What options are there to deriving a best response function?
- Competitive/Monopoly
2. F.O.C. π max
What are the steps to solving a Cournot game via qc and qm?
- Determine competitive market
- Determine Monopoly market
- Qa = qm - (qm/qc)Qb
- Qa = Qb = Q* (plug one into the other)
What is the relation between Cournot, monopoly and competitive Q and P?
- Industry output in Cournot is greater than the monopoly output and less than the competiviet output
- This prices if less than the monopoly price and greater than the completive
What is the relation between n and P in cournot?
As the number of firms increases, market prices decreases
What is essential in determining eqm P in Cournot?
Price is a function of total market Q, not individual firms’
What is an isoprofit and what do they look like?
- A function that defines the combinations of outputs produces by all firms that yield a given firm the same level of profits
- CURVES towards PC output
- INCREASES towards MONOPOLY output
If X axis = Qa, on whose BR function will X-Axis Qm and Qc belong to?
Qm = Firm A (x-axis) Qc = Firm B (y-axis)
If X axis = Qa, on whose BR function will Y-Axis Qm and Qc belong to?
Qm = Firm B (y-axis) Qc = Firm A (x-axis)
What does a decline in Firm Y’s MC have on it’s BR function?
BR(Y) shifts upwards
i.e. for any given level of firm 1, firm 2’s best response is going to increase
Has no effect on firm1’s best response
How do Cournot firms collude?
By reducing output (produce qm jointly/evenly)
What is true of Cournot collusion?
- Each firm cannot improve its payoff by deviating from a Nash eqn unilaterally
- Collusive agreement is not a Nash eqm and is not sustainable
- Firm’s are not playing their best responses
- Collusive agreement is not a Nash eqm and is not sustainable
What does the sustainability of Cournot collusion imply?
- In infinitely repeated game framework firms may be able to sustain collusion
- Totally not possible to be nash eqn in one shot game though
How is collusion shown in Cournot?
- Line running from Qm1 to Qm2
- Point M: both firms produce 1/2 of monopoly level
- Given that firm 1 is producing at M, firm 2 has an incentive to deviate from this level and produce to its best response curve