week 7 Oligopoly and Monopolistic competition

Question 1

Monopolistic competition

Answer 1

• More than one firm
• Each firm attempts to product differentiate from its competitors
• some monopoly power but still some competition
• e.g Coke in the cola market
  Many firms due to no entry and exit barriers

Question 2

Oligopoly models

Answer 2

-markets with only a few large firms, quite dominant lot of market power, impose constraint on what other firms can do

Question 3

Cournot competition

Answer 3

Simultaneous quantity choice

Homogenous cost

Heterogenous cost (many firms) (see in seminar)

oligopoly firms simultaneously decide their level of output, then market determines price

each firm makes output decision in anticipation of the others, if anticipate wrong they adjust and process will continue until equilibrium is found.

Question 4

oligopoly comparison to other market structures

Answer 4

same demand and MC for different structure

as in perfect comp MR=P
Monopoly low output high price

Cournot example- somewhere in middle of monopoly and perfect comp because of other firm

Can’t produce monopoly output due to other firm- if produce monopoly output the other firm will produce so will push down the market price

But still have monopoly power relative to prefect comp

Question 5

comparative statics

Answer 5

This tells us how one variable changes when another variable changes.

What happens if a increase (willingness to pay)=
A higher a means higher price and quantity- more demand allows to support higher price and quantity

If slope of inverse demand decreases (decreasing b)= We see that output increase able to sustain profits as price doesn’t fall as quickly

If marginal cost increase= Output decreases and price increases, negative relationship between c and q positive realtionship p and q.

Question 6

Stacklberg SPE vs Cournot NE

Answer 6

• Stackelberg quantity is strictly greater than corner as more is produced. i.e. more competition as lower price closer to prefect comp
  Irreversibility of firm decisions is important, once produced certain amount the firm can’t change its output. This would cause problems as firm 1 would then change then firm 2 etc.. And actually produce Cournot NE

First mover advantage in stackleberg

Firm 2 is left with residual demand and will not produce too much or price will be very low reducing their own MR and therefore profit.

So firm 1 produces more.

Question 7

Bertrand duopoly

Answer 7

envisages that oligopolisitc firms simultaneously decide their price and the market then decides the quantity each firm sell

best response is to set its price slightly below the price of the other firm