LOS 12.d Flashcards
(15 cards)
What is a key characteristic of an oligopoly market compared to monopolistic competition?
Higher barriers to entry and fewer firms
Oligopolies exhibit interdependence among firms, meaning actions by one firm significantly affect others.
What is the kinked demand curve model’s assumption about competitors’ price changes?
Competitors are unlikely to match a price increase but very likely to match a price decrease
This creates a kink in the demand curve faced by each producer.
In the kinked demand curve model, what happens when a firm raises its price above the kink?
It loses market share because competitors remain at the kink
Above PK, the demand curve is relatively elastic.
What is the profit-maximizing level of output in the kinked demand curve model?
The price where the kink is located at
What is the relationship between the kinked demand curve and the marginal revenue curve?
There is a gap in the associated MR curve
The price where the kink is located is the firm’s profit-maximizing price.
What does the Cournot model assume about the pricing decisions of firms?
Firms choose their preferred selling price based on the price set by the other firm in the previous period
This model leads to a long-run equilibrium where both firms sell the same quantity.
In the Stackelberg model, how do firms make pricing decisions?
Pricing decisions are made sequentially, with one firm acting as a leader
The leader sets a price first, influencing the follower’s price decision.
What defines a Nash equilibrium in the context of oligopoly?
A situation where no firm can increase profits by unilaterally changing its price strategy
This concept was developed by John Nash.
What happens to profits in a collusive agreement compared to a Nash equilibrium?
Collusion can increase profits for both firms compared to the Nash equilibrium
Example: When both firms charge a high price, total profits are maximized.
What is an example of a collusive agreement in the oil market?
The OPEC cartel
Members agree to restrict oil production to raise prices.
What conditions make collusive agreements more successful in an oligopoly?
- Fewer firms
- More similar products
- More similar cost structures
- Smaller and frequent purchases
- Certain and severe retaliation for cheating
- Less competition from outside the cartel
What characterizes the dominant firm model in an oligopoly?
A single firm has a significantly large market share and determines the market price
The dominant firm maximizes profits based on the market demand curve.
What happens if a competitive firm decreases its price below the dominant firm’s price?
The competitive firm will decrease output or exit the industry in the long run
This affects the market share of the dominant firm.
What is the expected price outcome in an oligopoly market?
Somewhere between the monopoly price and the price resulting from perfect competition
This reflects the interdependence of firms and their pricing strategies.
