L9-11

Question 1

Teamwork

Answer 1

Individual player’s decisions have positive spillovers on productivity of other team members, hence they affect teamwork and the team’s performance.

Question 2

we model productivity spillovers by

Answer 2

assuming that each player’s cost of action decreases in action of the other player: the higher is the action (effort) of other player, the lower is my cost

Question 3

source of inefficiency in teamwork

Answer 3

individual’s failure to internalize the effects of own actions and/or costs on other team members /has no say in what the other’s action is/

Question 4

extreme case of teamwork

Answer 4

pure cooperation, which takes place when productivity of another team member is unaffected by my decision, but each player’s decision has positive spillovers on the payoffs of all players

Question 5

Simple model of teamwork (partnership game)

the payoffs of p1 and p2

Answer 5

payoff to p1 = 2(x+y+cxy)-x^2

payoff to p2 = 2(x+y+cxy)-y^2

Question 6

Simple model of teamwork (partnership game)

each player’s payoff ..

Answer 6

increases in the action by the other layer, due to the complementary parameter c>0

Question 7

BR function of a player is

Answer 7

a function that for each her possible belief about other player action identifies the action of the player that maximizes her payoff

Question 8

Why team will act inefficiently

Answer 8

because players dont internalize the benefit their action has on other players and individually acting they won’t choose the joint payoff maximization since it is not a NE

Question 9

Oligopoly

Answer 9

1. Firms dont behave as price-takers, but their actions affect demand
2. There’s no entry (only fixed n of firms)
3. Consumers take prices as given

Question 10

In oligopolies, firms maximize their profit along the

Answer 10

residual demand (the demand expected not to be satisfied by the other firms)

Question 11

3 types of models

Answer 11

1. Cournot competition
2. Bertrand competition
3. Stackleberg model

Question 12

Cournot competition

Answer 12

1. Firms set quantities SIMULTANEOUSLY
2. As the number of firms increases, prices decrease and competition becomes more severe
3. When firms differ in costs, the more efficient firm produces more

Question 13

Bertrand competition

Answer 13

1. 1 homogeneous good
2. 2 firms, same cost function
3. firms set PRICES, independently and simultaneously
4. each firm can satisfy any demand ( if no capacity constraints)

Question 14

Bertrand paradox

Answer 14

Competition is as severe as perfect competition with 2 firms only

Think of a f1 setting price of 1 and f2 setting p of 0.99 (f2 gets all customers)

Question 15

Stackleberg model

Answer 15

Firms set quantities, one after another, they move SEQUENTIALLY

Question 16

Cournot model of imperfectly competitive market

Answer 16

1. Firms set quantities, independently and simultaneously
2. Market has 1 homogeneous good
3. Market entry is impossible

Question 17

Cournot model of imperfectly competitive market - real life examples

Answer 17

A) when several firms dominate the market, and despite the fact that the market is in principle “open” to entry the costs of entry prevent it
B) the competitor’s product is perceived as differentiated (soft drinks vs coca cola) -> no perfect competition
C) More: Airline companies, oil market, Boeing and Airbus

Question 18

Cournot competition symmetric duopoly insight

Answer 18

Choosing capacity and then competing in prices results in the same behavior as when choosing quantity directly

Question 19

Sources of barriers into a market

Answer 19

1. Economies of scale
2. Product differentiation - entrants are forced to invest heavily in advertising
3. Capital requirements
4. Switching costs - one time costs that the buyer faces when switching an existing suppliers product to a new entrant
5. Access to distribution channels
6. Cost disadvantages independent of scale - Inc may have cost advantages that cant be replicated by potential entrants (location, access to raw material, government subsidies)
7. Government policy

Question 20

Asymmetric Cournot duopoly

Answer 20

Firms set quantities, independently and simultaneously

2 firms, asymmetric (linear) costs

Question 21

Symmetric Cournot duopoly

Answer 21

Firms with symmetric costs

Question 22

Positive consequences of Cournot duopoly

Answer 22

Joint profit on the Cournot competition is LOWER than when firms coordinate their decisions and act as monopolists, and the total quantity is higher and prices lower. -> Lower profits vs Higher customer surplus

Question 23

Duopoly is less efficient than….,

but more efficient than…

Answer 23

Duopoly is less efficient than a perfect competitive market,

but more efficient than a monopoly

Question 24

The BR function of a firm in the Cournot model of a firm is

Answer 24

decreasing in the Q of the other firm -> the more the other firm produces, the less the firm itself will optimally produce

Question 25

The actions of the firms in Cournot model are

Answer 25

strategic substitutes - if 1 firm produces less, the other firm substitutes for the quantity withdrawn and produces more.

Question 26

The actions of the firms in team production (partnership) are

Answer 26

strategic complements - the BR functions of 2 firms are increasing in each other actions - if one firm produces more, then the other optimally will also produce more

Question 27

Increasing the n of firms in a symmetric oligopoly

Answer 27

Suppose each firm has payoff: (100-q1-q2...-qn)*qi-cqi and it always yields: q*= (100-c) / N+1

Question 28

N-firm Cournot competition shows that

Answer 28

1. Each firm's individual output decreases in N 2. Aggregate output of the whole Cournot market with N firms Q* = Nq* is increasing with the number of N 3. As N increases, output increases to that of a perfectly competitive market, and price decreases to MC

Question 29

Stackleberg model market relevance

Answer 29

Leader has to be committed to the action, otherwise impossible to account for the second movers behavior

Question 30

Examples of Stackleberg

Answer 30

Brand vs non-brand producer - the brand producer is committed and doesn't switch between markets; non-brand producer is flexible and follows the leader

Question 31

Who moves first in Stackleberg model

Answer 31

The leader and has a first-mover advantage = power, and produces more than the follower

Question 32

How do we solve Stackleberg

Answer 32

The leader sets the quantity and the follower observes and moves after the leader, hence, the follower maximizes on the observed choice of the leader, so we always START WITH THE FOLLOWER!!! FOC of F2, because we use backwards induction as the firms move sequentially

Question 33

Stackleberg vs Cournot

Answer 33

1. Total output is lower than Cournot 2. Price higher than Cournot 2. Symmetric Stackleberg is more competitive than symmetric Cournot

Question 34

Increasing the N of firms in Cournot oligopoly leads to

Answer 34

increasing efficiency - overall output increases/price decreases

Question 35

Strategic actions of firms in Bertrand model are

Answer 35

Strategic complements

Question 36

Under incomplete information about costs structure of Cournot competing firms, efficient firms have incentives to... and inefficient ...

Answer 36

efficient firms have incentives to signal their own type (product guarantees) inefficient firms benefits from committing to Not respond to the information (fixed price guarantees)

Question 37

Real-world examples of Bertrand model

Answer 37

``` many services (easy to extend supply without additional fixed costs) – e.g. book publisher (variable costs change when printing more books, not fixed costs) ```

Question 38

We cant use derivatives to find the BR functions and the equilibrium in Bertrand model, because

Answer 38

the demand that a firm faces is not continuous

Question 39

Bertrand competition: | BR function of firm 1 to firm's 2 price BR1(p2) =

Answer 39

. if p2p2 and sell nothing (but make no losses) ... if p2>c but p2≤pM, then 1 will set p1=p2 - е and sell all ... if p2>c and p2>pM, then 1 will set p1=pM and sell all as monopoly ... if p2=c then 1 will set p1=c OR p1

Question 40

The only NE in Bertrand market is

Answer 40

one where both firms charge p at the MC p1=p2=c A profit maximizing firm won't set p lower than p that results in 0 profits, the minimal p a firm is willing to charge is the MC p=c>0

Question 41

Adding capacity constraints to Bertrand model (Edgeworth duopoly model)

Answer 41

There is no pure strategy NE, because the second firm will always charge less than the first. Hence, it results in a range of prices, the firms randomized between with some minimum price pmin > MC, therefore even with capacity constraints they make positive profits with competition in prices

Question 42

Price dispersion

Answer 42

selling the same product at different prices in the same market

Question 43

Dixit model Commitment: entry is deterred in a sequentially rational way only if commitment is

Answer 43

successful and the threat is credible: Pm-Pd > C > Pd-Pw

Question 44

Hold-up problem cause

Answer 44

When economic actors could jointly arrive at economically profitable specific agreement, but cannot write a complete contract at the time they initiate their cooperation, they face a hold up problem

Question 45

Hold up problem

Answer 45

the first mover invests into the production before the benefits an be contractually agreed, whereupon the second mover can extract all bargaining surplus due to the asset specificity (no market for it elsewhere)

Question 46

solutions to hold-up problem

Answer 46

A) write contracts precluding power abuse B) create long-run relationships C) internalize the problem by taking over the bargaining partner D) Integrate services/suppliers into own firm

Question 47

types of product differentiation

Answer 47

vertical = quality differences, same function horizontal = same quality, different function

Question 48

Sources of product differentiation

Answer 48

Natural = location, technology, associations (Russian vodka), consumer preferences Strategic - additional services, misleading advertising, higher rate of replacement (switching from Apple to Microsoft)

Question 49

The EU Commission monitors

Answer 49

1. agreements between companies that restrict competition (cartels) 2. abuse of dominant position 3. mergers 4. efforts to open markets to competition 5. financial support (state aid) for companies from EU governments 6. cooperation with national competition authorities in EU countries

Question 50

Competition is

Answer 50

a basic mechanism of the market economy that encourages: 1. companies to offer consumers goods and services on the most favorable 2. efficiency and price reduction 3. innovation

Question 51

Collusion

Answer 51

Price fixing with the goal to shift profits to the colluding firms

Question 52

tacit collusion

Answer 52

coordinated behavior without explicit coordinating actions (communication), non-committing exchange (dinners), lowest price guarantees etc.

Question 53

Collusion as a prisoners dilemma

Answer 53

T > C > D > S Deviating from cartel agreement does not pay off for firm if the discount factor is higher than the threshold value of discount factor d = (T-C)/ (T-D)

Question 54

If the threshold discount factor is higher

Answer 54

the collusion is less likely

Question 55

Factors affecting successful cartel / collusion

Answer 55

1. cartel profitability - ability to exert impact on demand and raise prices = cooperation value 2. cartel enforcement - ability to prevent cartel members from freeriding = long-run defection value

Question 56

Factors facilitating collusion - cartel profitability

Answer 56

1. N of firms 2. Elasticity of demand 3. Control over input 4. Asymmetries 5. Low threat of entry 6. Demand stability

Question 57

Factors facilitating collusion - cartel enforcement

Answer 57

1. Info on deviations of other firms - market transparency 2. Frequency of orders 3. Visibility of outputs, geographical distance 4. Stable demand to be able to detect cheaters 5. N of firms 6. Similar products

Question 58

EU Antitrust policy

Answer 58

Antitrust policy = actions against cartels

Question 59

cartel

Answer 59

group of similar, independent companies which join together to fix prices, to limit production or to share markets or customers between them

Question 60

collusion

Answer 60

explicit commitment to an agreed course of action of individual cartel members

Question 61

Leniency policy

Answer 61

Encourages companies to hand over inside evidence. The first company in any cartel to do so will not have to pay a fine

Question 62

Leniency Notice

Answer 62

allows the Commission to offer full immunity or a reduction in the fines on a cartel member in exchange for disclosure of information on the cartel and cooperation with the investigation

Question 63

Fine system

Answer 63

1. Size dependent on duration of a cartel - fines may be based up to 30% of the company's annual sales to which the infringement relates, multiplied by the n of years of participation in the infringement 2. Entry fee 3. Repeated offenders - will be fined more heavily (up to 100% of sales)