Week 4

Question 1

How do we solve the Bertrand model with differentiated products?

Answer 1

1) Assume feta=0.5 and zero costs (only if stated in question)
2) Find the profit functions in terms of price
3) Take FOCs via product rule differentiation to find the best response
4) Use the best response to find an equilibrium price and quantities

Question 2

What is the main difference between the Bertrand & Cournot oligopoly (specifically duopoly) model and what are the consequences?

Answer 2

The Bertrand model chooses the price and the Cournot model chooses the quantity, hence when we solve for Cournot we find the profit functions in terms of quantity… Cournot quantity should be lower than Bertrand

Question 3

What happened in 1956 that changed UK competition?

Answer 3

-Restrictive agreements (collusion) were required to be registered and firms had to make a case as to why these agreements were in the public interest, meaning not many agreements were approved… this led to more concentration in the markets as previously, colluding firms that were less efficient exited the market

Question 4

What are the current punishments for collusion?

Answer 4

-Fines of up to 10% of global turnover
-Sued by victims
-Disqualification as a director
-Jail time

Question 5

How do you catch cartels?

Answer 5

-Economists can identify movements in prices and link these to strategic interaction, however, this evidence can be circumstantial… need solid evidence on the communication of collusion
-Also need to demonstrate welfare impact of collusion, etc

Question 6

How do we solve Bertrand model for 2 firms?

Answer 6

Differentiate profit with repsect to price to find best response curves and symmetry when p1=p2=pb

Question 7

What happened in the English copper industry in the 18th century?

Answer 7

-An agreement for undercutting on price and no limit on output, leading to significant increases in production with unsold copper in warehouses
-Outside copper began to enter the market, causing Anglesey to defect and release its copper onto the market (price agreement collapsed)
-Boulton (another manufacturer) formed a new cartel with restrictions on production with favourable conditions… Anglesey started to run out and Napoleonic wars increased demands
-Now, they released copper at favourable prices
-Demonstrates how you need to monitor rival’s output and price