week 9 Flashcards
what is oligopoly
a market with many buyers and few sellers
what is strategic interaction
the pay-off of one economic agent is dependant on the choices of others
what is a cartel
a group of independent market participants who collude with each other in order to improve their profits and dominate the market
usually illegal
example - OPEC
what is cartel instability
idea that if one firm cuts their prices they can increase the quantity of goods sold
incentives for members to cheat
what is entry deterrence
when an existing firm in the market acts in a manner to discourage the entry of new potential firms to the market
if the entrant stays out the incumbent gets 100% profit
if the entrant enters the incumbent chooses to accommodate the entrant or compete
if they compete they enter a price war and both lose
if the accommodate both get modest profits
what is normal form representation
includes all perceptible and conceivable strategies and their corresponding playoffs for each player
what is the cournot modek
a market where firms decide output levels
usually focuses on two producers
assume - highly substitutable products
firms have the same technology and face same input costs
constant unit costs and straight line market demand curve
what is the bertrand model
a market where firms decide price
firms compete on price, allowing the market to decide the volume sold at that price
each firm assumes the others will charge current prices
what is the reaction function
best response of a player
if firms maximise profits, the best response if the response that yields the highest profit
what is the Cournot equilibrium
where the reaction functions intersect each firm takes the other firms output as given, each firms response is optimal given the other firms action
each firm sets MC equal to residual MR, so produces to the left of the point at which AC reaches a minimum
what is undercutting
firms typically see opportunities with Bertrand pricing to just price below their rivals and steal the whole market
any firm can do this as long as their price is not beneath marginal cost
what is the bertrand paradox
two similar firms producing a highly suitable output, the Nash equilibrium in prices P=MC
as long as there are at least two players, perfectly competitive price emerges
what are the three reasons the betrand paradox will not hold
the firms have capacity constraints and output cannot increase sufficiently for price to be driven down to cost
product differentiation means that the firms products are not highly substitutable
the firms understand that the short term gain from undercutting leads to falling profits in the longer term
what is monopolistic competition
occurs where there are many buyers and many sellers and sellers can differentiate their products
this puts a downward slope on each firms demand curve
what are the five sources of market power
exclusive control over important inputs
patents and copyrights
governments licenses or franchises
economies of scale
network economies
