Prerequisites Flashcards
How much market share does a pure monopoly hold?
100%
How much market share does a dominant firm hold
50% - 100%
most real world markets are ______
oligopolies
the lower the price elasticity, the ____ the price-cost margin should be set by a monopolist
greater
is defining a monopoly based on market power effective?
no, it is likely to lead to problems of market definition
one firm increasing prices is likely to influence another firms profit in which market structure?
oligopoly
what do Betrand and Cournott Models characterise?
the process of interdependent strategic decision making under oligopoly
What market structure does the Betrand Model use?
Duopoly
What are the assumptions in the Bertrand Model?
Firms have:
1. homogeneous goods in the market (perfect substitutes)
2. Same (constant) MC
3. they set prices simultaneously without knowing the price set by the rival
4. the demand is linear
If Firm 1 expects Firm 2 to price below MC, firm 1’s optimal choice is to…
Set prices higher than firm 2 (P = MC)
If Firm 1 expects Firm 2 to set prices greater than MC but lower than monopoly pricing, Firm 1 should…
Set prices lower than Firm 2
If Firm 1 expects Firm 2 to set prices greater than monopoly pricing, Firm 1 should…
Set prices equal to monopoly pricing
What is a Nash Equilibrium?
Where both firms set prices equal to MC, representing a stable outcome where neither firm can improve its profits by unilaterally changing its price
What is another word for the Firms Reaction Curve?
Best Response Function
What does the reaction curve show?
a firms optimal pricing strategy in response to various prices set by the rival firm
What market outcome does the Bertrand Model suggest?
similar to perfect competition
What are the assumptions of Cournot model
- 2 firms compete for a homogenous product
- each firm simultaneously chooses the quantity it wants to produce
- market price is determined where total demand equals total quantity produced
- constant MC
What is the equation for a firms profit in the Cournot model
profit of firm 1 = Q1 x P (Q1 + Q2) - C
What is the overarching goals in the Bertrand and Cournot Models
Derive the equilibrium of the model
What are the 2 steps to derive the equilibrium of the Cournot model?
- derive each firms optimal choice (reaction curve) given what the rival firm does
- put the reaction curves together and find a mutually consistent combination of actions and conjectures
What does residual demand refer to in the Cournot model
Demand that remains for a firm after accounting for the quantity produced by its competitors. So the relationship between the quantity produced by one firm and the price it can sell its product at, given the quantity produced by its competitors.
What should firm 1’s optimal output be if it knows firm 2’s q = 0?
Choose the monopoly quantity
What should firm 1’s optimal quantity be if firm 2 were to choose the quantity corresponding to perfect competition
Choose to produce nothing
Why can we assume that firm 1’s reaction function is the same as firm 2’s in the Cournot model?
Both firms have the same cost function so reaction functions are symmetric
Where is the equilibrium point in the cournot model given
intersection of the reaction curves
Total output under Cournot (and general oligpolies) is ___ than that under monopoly and _____ than that under perfect competition
a) greater
b) lower
Cournot model predicts price under duopoly is ___ than monopoly price but ____ under perfect competition
a) lower
b) greater
True or false
The betrand model predicts that duopoly competition is sufficient to drive prices down to MC level
true lol
What kind of industries are better described using cournot models?
Ones where capacity or output is a long run decision with respect to prices (its easier to adjust prices levels than output)
If capacity and output can be easily adjusted, then the___ model is a better approximation of duopoly competition
Bertrand
Most real world industries seem to be closer to the case where ____ is difficult to adjust so the ___ model
a) Output
b) Cournot
What is the definition of comparative statics
we compare two equilibria, with two sets of exogenous conditions, and predict how a shift in one variable will influence the other variables.
What does the firms reaction function depend on?
Marginal Cost
An increase in MC implies a ____ shift of the reaction curve
downward
A devaluation of a currency will lead to an ___ shift of the reaction curve
upward
In practise is cournot closer to perfect competition or monopoly?
Perfect competition
