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Economics - Micro > Oligopoly > Flashcards

Oligopoly Flashcards

1
Q

What are two characteristics of a oligopoly?

A
  1. ) Few firms

2. ) Some barriers to entry

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2
Q

Why do we have different oligopolies?

A

Depends on whether you allow the product to differentiation or not

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3
Q

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

A

Producers care what each other are doing

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4
Q

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

A

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

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5
Q

Define oligopoly.

A

Market structure in which a few competitors operator

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6
Q

Define monopolistic competition.

A

Market structure with a large number of firms selling differentiated products

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7
Q

What is quantity competition?

A

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

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8
Q

What is price competition?

A

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

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9
Q

What model do we look at for price competition?

A

Bertrand model

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10
Q

What two models do we look at for quantity competition?

A

Cournot and Stackelberg Models

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11
Q

What is duopoly?

A

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

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12
Q

In a duopoly what demand curves do the firms produce?

A

The same demand curve

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13
Q

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

A

They are in the same market and sell the same product

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14
Q

In a duopoly what do we split quantity into?

A

qA+qB

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15
Q

What does the demand curve equation look like for duopoly?

A

P = c + d(qA+qB)

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16
Q

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

A

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

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17
Q

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

A

0 because it won’t effect the analysis

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18
Q

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

A

They are equal, face same total cost function structure

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19
Q

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

A

They act as a single firm like a monopolist

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20
Q

What is the aim of a cartel?

A

To maximise joint profits.

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21
Q

What model do we use for cartel?

A

Monopoly model

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22
Q

At what point will a cartel produce its output?

A

When MC=MR

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23
Q

Why are cartels not stable?

A

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

24
Q

Why is the betrand model unique?

A

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

25
Q

What is the basis for the Bertrand model?

A

Firms compete in terms of price

26
Q

Describe the Bertrand model.

A

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

27
Q

Name an assumptions of the Bertrand model.

A

The market is small

28
Q

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

A

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

29
Q

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

A

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

30
Q

So does the Betrand model end up being efficient?

A

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

31
Q

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

A

Cournot is not efficient but more efficient than monopoly

32
Q

What is basis of the cournot model?

A

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

33
Q

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

A

P = c + d(qA + qB)

34
Q

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

A

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

35
Q

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

A

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

36
Q

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

A

The same but A is swapped for B by symmetry

37
Q

What is the profit maximising output function called?

A

Reaction curve

38
Q

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

A

What firm B is doing

39
Q

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

A

Where they intersect

40
Q

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

A

Photo

41
Q

What is the producer surplus in Cournot equilbrium?

A

The operating profit

42
Q

Why does economic surplus increase in the Cournot model?

A

P moves closer to MC

43
Q

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

A

More efficient

44
Q

What is the basis of the stackelberg model?

A

Each firm sets its own quantity one at a time

45
Q

Who has the advantage in the stackelberg model?

A

The first mover

46
Q

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

A

The same as in the cournot model

47
Q

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

A

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

48
Q

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

A

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

49
Q

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

A

Because it lead and didn’t react

50
Q

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

A

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

51
Q

Why is stackelberg equilibrium more efficient than cournot equilbrium?

A

More output is produced and price is closed to MC

52
Q

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

A

It produces a higher quantity than before

53
Q

What are three characteristics of monopolistic competition?

A
  1. ) many sellers
  2. ) differentiated products
  3. ) no barrier to entry
54
Q

What is the short run like for monopolistic competition?

A

Monopoly

55
Q

What is the long run like for monopolistic competition?

A

Perfect competitive firms

56
Q

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

A

Each firm is monopoly suppler of its own differentiated product

57
Q

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

A

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

Economics - Micro (12 decks)

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