What are the two classic static models?

Cournot and Bertrand

Nash equilibrium

A pair of strategies such that neither firm can increase its profit by varying its output, given the output choice of the other firm

Best responses

The profit maximising choice of output for any output produced by the other firm

In a regular case if qj increases what happens to qi

qi decreases, MR(qi) decreases

How is market share illustrated?

qi/Q

When is the Cournot model used?

When quantity is set simultaneously

When is the bertrand model used?

When prices are chosen simultaneously

What is the outcome of the bertrand model?

Firms set p=mc and make no profits

When does the bertrand model result in profits?

When there are small capacity constraints such that (Ki

What is the outcome of the bertrand model when capacities equal cournot output?

Cournot prices are set. Each firm acts as a monopolist on their residual demand curve

Subgame perfect nash equilibrium

A strategy profile where no firm has a unilateral incentive to change its market strategy in any sub game of a larger game that is played over time

Complete contingency plan

A strategy specifies what a firm will do in any contingency that will require a decision

What is efficient rationing?

It maximises the number of goods sold, maximises producer surplus (profit) and there is a 1 to 1 trade off in produce and condumer surplus in this market

In the Bertrand model what does a higher t mean?

More product differentiation. Therefore the firms compete less and charge higher prices

What does the full hotelling model allow?

It allows firms to choose both price and locations in a two period game where firms choose locations first

How do we use backwards induction in the full hotelling model?

- solve for NE prices given location
- equilibrium locations will be decided while considering resultant NE prices
- solving in this way will deliver SPNE in locations and prices

Which firms does the dynamic Bertrand competition model with repetition apply to?

Those firms that provide services for non durable goods and compete for customers repeatedly

What is the outcome of the dynamic Bertrand competition with finite repetition?

There is no cooperation, both firms defect in all periods

What is the outcome of the dynamic Bertrand competition with infinite repetition?

Cooperation is possible as long as the discount rate is sufficiently high

How does the introduction of more firms effect the likelihood of cooperation in the Bertrand competition model with repetition?

The more firms there are the less likely cooperation is since the payoff from colluding is smaller

How does lag times in price changes effect the likelihood of cooperation in the Bertrand competition model with repetition?

The greater the lag time the higher the discount rate needs to be and the less likely cooperation will occur

When do we use stackelberg competition?

When firms compete over quantity sequentially

When is competition over quantity more likely to happen?

In the LR since in the SR firms have sticky or fixed production capacities

In Bertrand competition is there an advantage to moving first?

No

How do we solve stackelberg competition?

We solve for its SPNE by backwards induction, first solving for firm 2’s BR to q1 then finding q1

Which mover in stackelberg competition makes more profit?

The first mover

What is the incumbent firm?

The firm who moves first

What is required for an incumbent firm to keep out a potential entrant?

A fixed cost

What is a blockaded entry?

Occurs when the fixed cost is so high that any entry for firm 2 causes negative profit so firm 1 acts as a monopolist

What is accommodated entry?

When the profit for firm 1 of not allowing firm 2 to enter is smaller than it would be otherwise so they allow firm 2 to enter

What is incumbent predation?

Firm 1 commits to a quantity which fights off firm 2’s entry