13: Oligopoly Theory

Question 1

finding competitive output

Answer 1

p=MC

Question 2

best response to Bertrand model (setting price simultaneously)

Answer 2

if competitor sets price lower than MC, best response to set a higher price (earning 0 rather than negative profit by matching or going lower)

if competitor sets price equal to MC, best response is to set any price equal or higher (earning 0 rather than negative payoff by going lower)
- nash equilibrium

if the price is just about MC, best response to set price a bit lower (capturing all consumers at this price rather than half at the price equal to the competitor or none with a higher price)

Question 3

nash equilibrium in hotelling

Answer 3

have to be both at the centre
- each gets half the customers and couldn’t have done better in another location

if they locate at different points, either can get more people by locating closer to where the other chose

if they locate at the same point but not the centre, they can get more people by locating closer to the centre

Question 4

cournot model

Answer 4

both firms produce identical products and simultaneously choose how much output to produce

market clearing price depends on decision of both firms