Oligopoly

Question 1

4 Key characteristics of oligopolies

Answer 1

1. Market with a small number of firms
2. Homogenous product
3. Some barriers to entry/exit
4. Need to predict rival’s reactions

Question 2

Define game theory

Answer 2

Study of mathematical models of conflict and cooperation between intelligent rational decision-makers - Myerson,1991

Question 3

Define nash equilibirum

Answer 3

a situation in which no participant (player) has an incentive to deviate from his or her chosen strategy after considering an opponent’s choice

Question 4

4 types of barriers to entry

Answer 4

1. Technological barriers (patents/innovation)
2. Scale-related barriers
3. Strategic barriers (heavy branding)
4. Legal barriers (regulators)

Question 5

3 ways decisions are made under oligopolies

Answer 5

1. Collusion
2. Price Leadership
3. Non-cooperative game theory

Question 6

How do we model oligopolies that collude for profit?

Answer 6

Monopoly

Question 7

Where will a dominant firm set price?

Answer 7

MR = MC

Question 8

What happens to the market share if oligopoly follows dominant firm price leadership?

Answer 8

Large firm facilitates survival of small firms by charging a high price -> market share erodes

Question 9

3 key factors of cournot competition?

Answer 9

1. Fixed number of firms in short term
2. Firms choose quantities where MC = MR
3. Each firm takes rival’s output as given

Question 10

How do firms affect one another’s MR in cournot competition?

Answer 10

1. More firms produce = lower residual demand
2. MR determined from residual demand
3. The more other produce, the lower profit maximising output will be

Question 11

What is the Cornot-Nash equilibrium?

Answer 11

Reaction function of competing firms intersect - each firm’s conjecture about rival is correct -> neither will change behaviour

Question 12

How does the Stackelberg model differ from Cournot?

Answer 12

Assumes one firm moves first -> first mover advantage

Question 13

What is first movers advantage?

Answer 13

If you are the first mover and your competitor knows that you will produce a high output, the competitor would maximize profits by choosing low output

Question 14

What is the equilibrium outcome in Stackelberg model?

Answer 14

Firm which chooses output first produces more than firm that follows

Question 15

How does the Bertrand model differ from Cournot and Stackelberg?

Answer 15

Assumes firms compete over price and set price at the same time

Question 16

What is Nash equilibrium in Bertrand model?

Answer 16

P=MC

Question 17

What does the Bertrand model assume?

Answer 17

Firms are incentivised to cut price to get larger market shares -> normal profits