Topic 8: Oligopoly & Trade Flashcards
What are internal and external economies of scale?
Internal is when the cost per unit of output depends on firm size.
External is when the cost per unit of output depedns on industry size.
Show the demand relationship for a single oligopolistic, differentiated firm
Q is the individual firms output
S is the toal sales of the industry
n is the number of firms
b is a constant term representing the responsiveness of a firms sales to its price
P is the price charged by the firm
Pbar is the average price charged by competitors
If oligopolistic firms have identical demand functions and cost functions, what is the pricing relationship and AC equation?
P = c + 1/bn, AC = nF/S + c
Say there are two seperate markets, so
P0 = c + 1/bn, AC0 = nF/S + c
Explain what happens when the markets merge
P = c + 1/2bn < P0
AC = 2nF/2S + c = AC0
So the price rule shifts left and the equilibrium price is lower. The unprofitable firms exit, and the price of the fixed cost is reduced globally
Consumers are G but exits could hurt - though normally there are simply mergers.
How did we consider modelling a homogenous product oligopoly market?
Demand is Y = Bpε where ε < 0
Or the inverse:
p = B-1/εY1/ε
As there is constant costs, firms must maximise
p(Y)y - cy - C0
Where total output is Y and firm output is y.
Solve the producer problem for ogopolistic competition with constant costs, homogenous products
As:
p(Y)y - cy - C0 must be maximised where
p = B-1/εY1/ε
p’(Y)y+p(Y)-c=0
Which eventually gives:
p* = c / (1 + 1/nε dY/dy)
What is the conjectural variations parameter? What value is it when there is perfect competition?
The change in total output for a change in one firms output. Determines how competitive the market is.
When μ = 0, the firms output will not affect market output - this is perfect competition, so firms can’t affect prices.
What is the Cournot assumption?
That when the focus firm raises its output by one unit, other firms hold their output constant. Total output then rises by only the amount that the focus firms output rises. This means that μ = 1, so that the pricing rule is:
p* = c / (1 + 1/nε )
What is the value of the conjectural variations parameter in the cartel case? What does this imply?
μ = n.
This means all the firms act in unison. This means that the firms will act as a monopoly, and share the monopoly profits. Their pricing rule then is
c/(1 + 1/ε)
Under the Cournot assumption, what is the affect of trade distortions?
These close off competitors, and so mean that they can charge higher. We can see this by observing that increasing the number of our firms in the pricing equation c / (1 + 1/nε) brings the price closer to the actual marginal co
Why might elasticity be unchanged by a merging of markets?
If demand is Q = Apε
and εH = ε*
Then when we sum the two demand curves to integrate the market
Q = 2Apε
The elasticity hasn’t changed!
Explain why a change in demand composition following a trade reform may make firms more competitive.
Because the composition of demand moves away from intermediate demand and towards exports.
Exports tent to be more elastic.
So this reduces the market, reducing prices and increasing welfare.
How might changes in strategic interaction between firms following trade liberalization affect competitiveness?
If initially, 1 < μ < n
Then with the integration, the additional n foreign firms will increase the cost and likelyhood of collusive behavior working, so that
μ -> 1 and p -> MC
Again, good, as reduces prices and increases welfare.
How might an import tariff cause inefficiency in the local market?
Local firms may charge the import parity price (ie, the consumer price of imports).
These profits induce more firms to enter the market, and so cause greater fixed costs.
What is a ‘made to measure’ tariff?
A tariff large enough to induce enough domestic entry into the local market to eliminate all imports.
