L8: Models of Oligopoly

Question 1

strategic interaction and game theory

Answer 1

firm’s profit depends not only on their own actions but also on their rivals’

optimal decision depends on their rivals’ decisions

key difference from perfect competition and monopoly where a firm’s profit only depends on its own actions

Question 2

nash equilibrium

Answer 2

in equilibrium, every player maximises payoff by taking others’ actions as given

no player can raise payoff by unilaterally deviating

equilibrium strategies are mutual best responses to every other player’s actions

Question 3

simultaneous move games

Answer 3

both players play at the same time

Question 4

sequential move games

Answer 4

one plays first

Question 5

cournot oligopoly

Answer 5

assuming a homogenous good with multiple firms producing

firms choose quantity to supply to the market

Question 6

cournot vs. monopoly

Answer 6

total quantity is higher in cournot, price is lower and profits are lower

Question 7

why would firms not collude in cournot?

Answer 7

firms would be better off colluding but once they do, any firm is better off deviating and doing the best response of cournot so no nash equilibrium

Question 8

cournot with N firms

Answer 8

in equilibrium, each quantity goes to 0 but total quantities converge to the perfect competition equilibrium

in cournot, when number of firms goes to infinity, you have a perfectly competitive environment