Oligopoly Flashcards
What are two characteristics of a oligopoly?
- ) Few firms
2. ) Some barriers to entry
Why do we have different oligopolies?
Depends on whether you allow the product to differentiation or not
What is the implication of there being a small number of firms?
Producers care what each other are doing
Why don’t firms in perfect competition care what other firms are doing?
They are only a very very small part of the market and so they have no effect in it
Define oligopoly.
Market structure in which a few competitors operator
Define monopolistic competition.
Market structure with a large number of firms selling differentiated products
What is quantity competition?
Where each monopolist cares about the quantity the other monopolies are producing
What is price competition?
Where each monopolist cares about the price the other monopolies are charging
What model do we look at for price competition?
Bertrand model
What two models do we look at for quantity competition?
Cournot and Stackelberg Models
What is duopoly?
Two firms in the market and each firm sells the same product
In a duopoly what demand curves do the firms produce?
The same demand curve
Why do the firms in a duopoly have the same demand curve?
They are in the same market and sell the same product
In a duopoly what do we split quantity into?
qA+qB
What does the demand curve equation look like for duopoly?
P = c + d(qA+qB)
What do we assume about the total cost functions for duopoly?
They face the same cost function but depending on each of their quantities
What do we assume about fixed cost in a duopoly? and why?
0 because it won’t effect the analysis
How do the marginal costs of the two firms in a duopoly relate? and why?
They are equal, face same total cost function structure
What is meant by the firm in a duopoly acting like a cartel?
They act as a single firm like a monopolist
What is the aim of a cartel?
To maximise joint profits.
What model do we use for cartel?
Monopoly model
At what point will a cartel produce its output?
When MC=MR
Why are cartels not stable?
There are incentives to cheap, charge a lower price and attract more customers or produce more units of output
Why is the betrand model unique?
It is a model for imperfect competition yet when in equilbrium the market output is efficient
What is the basis for the Bertrand model?
Firms compete in terms of price
Describe the Bertrand model.
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
Name an assumptions of the Bertrand model.
The market is small
What does the assumption of the market being small in the Bertrand model mean?
There is a small number of consumers so it is possible for one firm to capture the entire market
Why couldn’t a Bertran model happen if there wasn’t a small market?
It wouldn’t be logistically possible for one firm to supply the entire market
So does the Betrand model end up being efficient?
In the end P = MC so there is no deadweight loss
How does the efficiency of the Cournot model, Betrand model and a monopoly compare?
Cournot is not efficient but more efficient than monopoly
What is basis of the cournot model?
Each firm must sell at the same price, but the price depends on how much output each firm is producing
What does the demand function look like in the cournot model?
P = c + d(qA + qB)
How do you find the TR and MR for a certain firm A in the cournot model?
TR = P x qA, then differentiate TR in terms of qA
How do you find the profit maximising function for firm A in the cournot model?
MRA = MCA, so sub in the MRA function you found and set it equal to MCA
If we know Firm A’s profit maximising output, what is firm B’s?
The same but A is swapped for B by symmetry
What is the profit maximising output function called?
Reaction curve
What is Firm A maximising its profits given in the cournot model?
What firm B is doing
How is the cournot equilibrium shown on the two reaction curves?
Where they intersect
Draw two reaction curves for the cournot model on a graph.
Photo
What is the producer surplus in Cournot equilbrium?
The operating profit
Why does economic surplus increase in the Cournot model?
P moves closer to MC
How does the stackelberg model efficiecy compare to the cournot model?
More efficient
What is the basis of the stackelberg model?
Each firm sets its own quantity one at a time
Who has the advantage in the stackelberg model?
The first mover
If firm A makes the first move in the stackelberg model what TR, MR and reaction curve foes firm B face?
The same as in the cournot model
If firm A makes the first move in the stackelberg model what TR function does it have?
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
If firm A makes the first move in the stackelberg model what MR function does it have?
We differentiate the new TR function will only be in terms of qa
If firm A makes the first move in the stackelberg model why does it not have. reaction function?
Because it lead and didn’t react
If firm A makes the first move in the stackelberg model what level of output will it produce?
It will make its new MR =MC and then produce at this level
Why is stackelberg equilibrium more efficient than cournot equilbrium?
More output is produced and price is closed to MC
Why does the leading firm in the cournot firm have a larger producer surplus?
It produces a higher quantity than before
What are three characteristics of monopolistic competition?
- ) many sellers
- ) differentiated products
- ) no barrier to entry
What is the short run like for monopolistic competition?
Monopoly
What is the long run like for monopolistic competition?
Perfect competitive firms
Why are monopolistic competition like a monopoly in the short run?
Each firm is monopoly suppler of its own differentiated product
Why are monopolistic competition like a monopoly in the long run?
There are no barrier to entry so new firm start selling similar products, demand curve shifts and becomes flatter like in competitive firms
