Oligopoly

Question 1

What are two characteristics of a oligopoly?

Answer 1

1. ) Few firms

2. ) Some barriers to entry

Question 2

Why do we have different oligopolies?

Answer 2

Depends on whether you allow the product to differentiation or not

Question 3

What is the implication of there being a small number of firms?

Answer 3

Producers care what each other are doing

Question 4

Why don’t firms in perfect competition care what other firms are doing?

Answer 4

They are only a very very small part of the market and so they have no effect in it

Question 5

Define oligopoly.

Answer 5

Market structure in which a few competitors operator

Question 6

Define monopolistic competition.

Answer 6

Market structure with a large number of firms selling differentiated products

Question 7

What is quantity competition?

Answer 7

Where each monopolist cares about the quantity the other monopolies are producing

Question 8

What is price competition?

Answer 8

Where each monopolist cares about the price the other monopolies are charging

Question 9

What model do we look at for price competition?

Answer 9

Bertrand model

Question 10

What two models do we look at for quantity competition?

Answer 10

Cournot and Stackelberg Models

Question 11

What is duopoly?

Answer 11

Two firms in the market and each firm sells the same product

Question 12

In a duopoly what demand curves do the firms produce?

Answer 12

The same demand curve

Question 13

Why do the firms in a duopoly have the same demand curve?

Answer 13

They are in the same market and sell the same product

Question 14

In a duopoly what do we split quantity into?

Answer 14

qA+qB

Question 15

What does the demand curve equation look like for duopoly?

Answer 15

P = c + d(qA+qB)

Question 16

What do we assume about the total cost functions for duopoly?

Answer 16

They face the same cost function but depending on each of their quantities

Question 17

What do we assume about fixed cost in a duopoly? and why?

Answer 17

0 because it won’t effect the analysis

Question 18

How do the marginal costs of the two firms in a duopoly relate? and why?

Answer 18

They are equal, face same total cost function structure

Question 19

What is meant by the firm in a duopoly acting like a cartel?

Answer 19

They act as a single firm like a monopolist

Question 20

What is the aim of a cartel?

Answer 20

To maximise joint profits.

Question 21

What model do we use for cartel?

Answer 21

Monopoly model

Question 22

At what point will a cartel produce its output?

Answer 22

When MC=MR

Question 23

Why are cartels not stable?

Answer 23

There are incentives to cheap, charge a lower price and attract more customers or produce more units of output

Question 24

Why is the betrand model unique?

Answer 24

It is a model for imperfect competition yet when in equilbrium the market output is efficient

Question 25

What is the basis for the Bertrand model?

Answer 25

Firms compete in terms of price

Question 26

Describe the Bertrand model.

Answer 26

Consumers will always buy from the cheapest seller so if pA > pB then firm B will capture the entire market and qA = 0 and qB. So firm A will undercut the price of firm B and capture the entire market. This will continue to happen with P = MC

Question 27

Name an assumptions of the Bertrand model.

Answer 27

The market is small

Question 28

What does the assumption of the market being small in the Bertrand model mean?

Answer 28

There is a small number of consumers so it is possible for one firm to capture the entire market

Question 29

Why couldn't a Bertran model happen if there wasn't a small market?

Answer 29

It wouldn't be logistically possible for one firm to supply the entire market

Question 30

So does the Betrand model end up being efficient?

Answer 30

In the end P = MC so there is no deadweight loss

Question 31

How does the efficiency of the Cournot model, Betrand model and a monopoly compare?

Answer 31

Cournot is not efficient but more efficient than monopoly

Question 32

What is basis of the cournot model?

Answer 32

Each firm must sell at the same price, but the price depends on how much output each firm is producing

Question 33

What does the demand function look like in the cournot model?

Answer 33

P = c + d(qA + qB)

Question 34

How do you find the TR and MR for a certain firm A in the cournot model?

Answer 34

TR = P x qA, then differentiate TR in terms of qA

Question 35

How do you find the profit maximising function for firm A in the cournot model?

Answer 35

MRA = MCA, so sub in the MRA function you found and set it equal to MCA

Question 36

If we know Firm A's profit maximising output, what is firm B's?

Answer 36

The same but A is swapped for B by symmetry

Question 37

What is the profit maximising output function called?

Answer 37

Reaction curve

Question 38

What is Firm A maximising its profits given in the cournot model?

Answer 38

What firm B is doing

Question 39

How is the cournot equilibrium shown on the two reaction curves?

Answer 39

Where they intersect

Question 40

Draw two reaction curves for the cournot model on a graph.

Answer 40

Photo

Question 41

What is the producer surplus in Cournot equilbrium?

Answer 41

The operating profit

Question 42

Why does economic surplus increase in the Cournot model?

Answer 42

P moves closer to MC

Question 43

How does the stackelberg model efficiecy compare to the cournot model?

Answer 43

More efficient

Question 44

What is the basis of the stackelberg model?

Answer 44

Each firm sets its own quantity one at a time

Question 45

Who has the advantage in the stackelberg model?

Answer 45

The first mover

Question 46

If firm A makes the first move in the stackelberg model what TR, MR and reaction curve foes firm B face?

Answer 46

The same as in the cournot model

Question 47

If firm A makes the first move in the stackelberg model what TR function does it have?

Answer 47

firm A knows the qB is no longer constant so replaces qB with its reaction curve, and then rearrange to get a quadratic in terms of qA

Question 48

If firm A makes the first move in the stackelberg model what MR function does it have?

Answer 48

We differentiate the new TR function will only be in terms of qa

Question 49

If firm A makes the first move in the stackelberg model why does it not have. reaction function?

Answer 49

Because it lead and didn't react

Question 50

If firm A makes the first move in the stackelberg model what level of output will it produce?

Answer 50

It will make its new MR =MC and then produce at this level

Question 51

Why is stackelberg equilibrium more efficient than cournot equilbrium?

Answer 51

More output is produced and price is closed to MC

Question 52

Why does the leading firm in the cournot firm have a larger producer surplus?

Answer 52

It produces a higher quantity than before

Question 53

What are three characteristics of monopolistic competition?

Answer 53

1. ) many sellers 2. ) differentiated products 3. ) no barrier to entry

Question 54

What is the short run like for monopolistic competition?

Answer 54

Monopoly

Question 55

What is the long run like for monopolistic competition?

Answer 55

Perfect competitive firms

Question 56

Why are monopolistic competition like a monopoly in the short run?

Answer 56

Each firm is monopoly suppler of its own differentiated product

Question 57

Why are monopolistic competition like a monopoly in the long run?

Answer 57

There are no barrier to entry so new firm start selling similar products, demand curve shifts and becomes flatter like in competitive firms