4. Oligopoly

Question 1

What are the two classic static models?

Answer 1

Cournot and Bertrand

Question 2

Nash equilibrium

Answer 2

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

Question 3

Best responses

Answer 3

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

Question 4

In a regular case if qj increases what happens to qi

Answer 4

qi decreases, MR(qi) decreases

Question 5

How is market share illustrated?

Answer 5

qi/Q

Question 6

When is the Cournot model used?

Answer 6

When quantity is set simultaneously

Question 7

When is the bertrand model used?

Answer 7

When prices are chosen simultaneously

Question 8

What is the outcome of the bertrand model?

Answer 8

Firms set p=mc and make no profits

Question 9

When does the bertrand model result in profits?

Answer 9

When there are small capacity constraints such that (Ki

Question 10

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

Answer 10

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

Question 11

Subgame perfect nash equilibrium

Answer 11

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

Question 12

Complete contingency plan

Answer 12

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

Question 13

What is efficient rationing?

Answer 13

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

Question 14

In the Bertrand model what does a higher t mean?

Answer 14

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

Question 15

What does the full hotelling model allow?

Answer 15

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

Question 16

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

Answer 16

• 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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

There is no cooperation, both firms defect in all periods

Question 19

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

Answer 19

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

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

When do we use stackelberg competition?

Answer 22

When firms compete over quantity sequentially

Question 23

When is competition over quantity more likely to happen?

Answer 23

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

Question 24

In Bertrand competition is there an advantage to moving first?

Answer 24

No

Question 25

How do we solve stackelberg competition?

Answer 25

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

Question 26

Which mover in stackelberg competition makes more profit?

Answer 26

The first mover

Question 27

What is the incumbent firm?

Answer 27

The firm who moves first

Question 28

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

Answer 28

A fixed cost

Question 29

What is a blockaded entry?

Answer 29

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

Question 30

What is accommodated entry?

Answer 30

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

Question 31

What is incumbent predation?

Answer 31

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