Oligopoly Flashcards
Oligopoly Market Characteristics
-High Barriers to entry (abnormal prof.)
-Few Firms (strategic interaction)
- Homogenous Products
-(elastic demand)
Bertrand Assumptions
-[oligopoly assumptions] +
- Price setting comp
- Costs = symmetric
what is the bertrand paradox
-Firms undercut to arrive at NE where p=c…
-…Despite there being only two firms the outcome is the same as under Perfect competition
what is the nash equillibrium in bertrand
- p=c
- 0 profits
- Allocative efficiency
what are possible solutions to the bertrand paradox?
- (asymmetric costs +) capacity constraints: when the undercutting firm cant supply entire markets so the residual demand pays a higher price with other firm
- product differentiation: if consumers aren’t indifferent then a higher price can be charged
- tacit collusion may prevail if repeated interaction
Cournot Assumptions
- [oligopoly assumptions] +
- Quantity setting
- costs not necessarily symmetric
what happens when the number of firms increase in cournot?
The (symmetric linear) Cournot model
converges to perfect competition as the number of
firms increases.
what direction is a slope in strategic substitutes in cournot… what are strategic substitute…. and what if they are increasing
The two reaction functions are downward sloping, then quantities are called strategic substitutes.
basic oligopoly reaction functions
strategic complements slope upward
Effect of Perfect information in Bertrand and Cournot games.
- single shot game: NE only possible with Perfect Info
- Repeated game: NE possible (through iterative process of interaction) without perfect information.
Under what conditions would price comp arise?
- [oligopoly assumptions]
- excess capacities
- symmetric costs
Example:
Soft Drinks industry
Under what conditions would quantity comp arise?
- [oligopoly assumption+]
- limited capacity
Example:
Oil
