Quantity & price-setting oligopolists Flashcards
What’re the assumptions of Cournot’s model of oligopoly?
Duopolies (2 sellers in the market)
Firms produce homogenous (same) products
Further entry into market = blocked
When does a Cournot-Nash equilibrium exist?
Ceteris paribus, neither firm wants to change its output level
Residual demand curve + what does the shape depend on?
Given the quantity of its rivals, the firm’s demand curve
Depends on which firm produces more (e.g. if firm B produces more than firm A, firm A’s res. d curve is closer to origin)
What’re the assumptions of Bertrand’s model of oligopoly?
2 firms (duopolies)
Further entry = blocked
Firms have constant MC and no fixed costs
Firms produce homogenous products (if firms sets same P, both supply 1/2 the market)
(same as cournot’s)
What’s the difference between Bertrand and Cournot’s model of oligopoly?
Cournot = firms compete on Q
Bertrand = firms compete on P, buyers will buy from cheapest seller
When does a Bertrand-Nash equilibrium exist?
Ceteris paribus, neither firm wants to change P
What is the Bertrand paradox?
By adding one additional firm when there’s initially only one firm in the market, we go from extreme of monopoly to extreme of perf. comp. (PC)
In reality, this isn’t the case!
What are the 4 main ways to break the Bertrand paradox and why?
Product differentiation (sellers don’t lose all their customers when their P > rivals P)
Capacity constraints (a firm has market power over the residual D if the rival can’t supply the whole market)
Incomplete info. about P and search costs (lower P can’t attract consumers who aren’t aware of them)
Repeated interaction (firms may not compete intensely as Bertrand model predicts)
Residual demand
Market D that isn’t met by other sellers
Compare Bertrand’s model to a monopoly, how do they differ?
The duopolists set lower P than the monopoly (and Cournot) level + as a result produce more than under a monopoly
Compare Bertrand’s model to PC
Duopolists set the same P as market P of PC
No deadweight loss (total welfare max. (CS))
Compare Bertrand’s model of oligopoly to Cournot’s
Cournot = strategic substitutes (2 or more players mutually offset one another)
Bertrand = strategic completements (2 or more players reinforce one another)
Compare the equilibrium of the Cournot model with the outcome of monopoly and PC
market price > MC but lower than a monopolist’s price
