T2: 1.4 Flashcards
Define an oligopoly?
A market structure in which a small number of firms have a large majority of market share
2 simplifying assumptions for oligopoly?
- 2 firm only
- identical product
What is a quantity leadership?
When the leader sets a Q, and the follower then sets a Q based on what the leader sets - Stackelberg Oligopoly
How to solve a stackelberg oligopoly for q1 and q2? (Firm 1 being leader)
1) find inverse demand function for firm 1 (ITO their own quantity produced) (may have to use F2s RF)
2) solve for firm 1 MC=MR
3) sub in q1 into q2s RF to find for firm 2
See and draw isoprofit graph
Diagram page 1
Where does stackelberg equilibrium arise for a leader graphically?
At the point of tangency between the reaction function and the isoprofit lines
In price leadership model, what is the leader trying to optimise and why?
Optimise quantity since if the leader sets a price, the follower has to set the same price (identical goods)
Tf want to maximise y in (rev-cost)
What is a price leadership, and key point used in maths of it?
Leader sets price -> follower sets price based on leader’s
Since the goods are identical then if L sets a price F must use the same price!
Also demand curve of leader is given by the amount of demand left for the leader to fill after the follower’s output
What is a cournot equilibrium and when does it occur?
When both firms correctly predict the other firm’s output quantity AND they produce optimal output given their correct beliefs
Occurs in simultaneous quantity setting
Graphically where is a cournot equilibrium?
Where the two reaction functions cross
What is a Bertrand equilibrium and when does it occur?
When both firms correctly predict the other firm’s price and tf set optimal price given these beliefs
Occurs during simultaneous price setting
At what point does a Bertrand equilibrium occur?
When P=MC; since assuming a perfectly competitive market, If p1=p2>MC, the firm’s will undercut each other (Tf gaining all market share) until they reach the price floor, determined by the MC
What is a cartel?
A group of firms that jointly collude to behave like a monopolist and maximise sum of profits
Explain why if a firm has a lower cost of production in a cartel they will produce more output?
MRs must be equal across industry since if it wasn’t the organiser would shift production towards the firm with the higher MR (profit maximising across the industry) tf MCs must also be equal. This means if one firm has a lower MC they will increase output until their MC=MC(rest of cartel) tf they will produce more output
