Oligopoly Models Flashcards
What is an oligopoly?
A market featured by competition among a small number of firms
Write the assumptions of a Cournot Game
2 firms homogeneous goods compete through QUANTITY payoff: profits Static game - compete once (simultaneously)
Describe the concept of market power in the oligopoly setting
Cournot duopolists exercise market power, but it is limited by elasticity of market demand. Cournot mark ups are smaller than a monopoly mark up since, s less than 1
Why can’t Competition Policy use the Lerner Index?
Because the MC information is not readily available
Define the Herfindahl Hirschman Index
The sum of squares of market share of all firms - a measure of market concetration
Describe the ultimate difference between Cournot and Bertrand
Bertrand competition is where firms choose prices rather than quantities
Define the assumptions of the Bertrand model
- 2 firms competing in prices
- homogenous products
- constant MC
- Market demand D(p)
- Payoff: PROFITS
What are the paradoxical predictions of the Bertrand model?
- Two firms are enough to eliminate market power
- Competition between two firms completely dissipates profits (gain goes to consumers - different to the Cournot model)
What is unrealistic about the Bertrand model?
Products may be differentiated and there may be capacity constraints
What did Kreps-Scheinkerman suggest in 1983?
Cournot game can be seen as a shorthand description of a two-stage game where firms first invest in capacity then compete over prices
When is Cournot more appropriate?
When firms are capacity constrained and the investment in capacity takes time, e.g. hotel rooms, restraint seats
When is Bertrand more appropriate?
When there is constant returns to scale and no capacity restraints
