term 2 lecture 9 - oligopoly Flashcards
what is an oligopoly?
an industry consisting of few firms - particularly, each firms own price or output decisions affect its competitors profits ie there is interdependence between their decisions and profits
how do we analyse markets in which the supplying industry is oligopolistic?
oligopolistic modesl require game theoretic analysis
what are the assumptions of the cournot model?
products are homogenous
there are two firms
the choice variable is quantity
there is simultaneous decision making
the problem is to choose the quantity which maximises profit
when is an equillibrium reached in cournet competition?
an equillibrium is achieved wehn each firms output level is the best response to the other firms output level: neither wants to deviate from their output level
how do you find the equillibrium quantity for firm 1 and firm 2 in cournet competition?
1) multiply the marker inverse demand function by firm 1 quantity.
2) find the total profit for firm 1 by minusing firm 1 cost function from revenue
3) differentiate profit with respect to quantity of firm 1 then equal to zero to find reaction of curve of firm 1
4) repeat process for firm 2
5) equate the two reaction curves together to find equillibrium quantity for each frim
what are the properties of the cournet equillibrium
the price is greater than perfect competition but less than monopolist
profit is greater than perfect competition but lower than monopolist
market output is less than perfect competition but greater than monopoly
what are von stackelberg games?
when 1 firm is the leader and the other is a follower. the competition is a sequentioal game in which output levels are the strategic variable and firm 2s output might be continegent on firm 1s output
for stackleberg games is the leader better off?
yes as the leaders profit will be at least as large as its cournot nash equillibrium profit
how is the leaders choice of quantity chosen?
by using the followers reaction firm plugged in, you can calculate the output of y1 for which profit is maximised for firm 1
