Oligopoly models Flashcards
What is the main assumption of the Cournot model?
Firms compete by setting quantities simultaneously and assume their rivals quantity is fixed
What is a reaction function in Cournot competition?
It shows a firms optimal output in response to the output of its rival
How is Cournot equilibrium output different from monopoly and perfect competition?
it is higher than monopoly output but smaller than perfect competition output
What causes the Bertrand Paradox?
When a firm sets prices simultaneously and produce homogenous goods price is driven down to marginal cost
Why is Bertrand more competitive than Cournot?
Because price competition cleads to zero economic profit, similar to perfect competition
In Stackelberg competition who has advantage and why?
The leader has advantage because it moves first and can choose a quantity that influences the followers best response
How does Stackelberg output compare to Cournot?
Total output is higher in Stackelberg due to the leaders aggressive quantity choice
What is residual demand in the price leadership model?
The part of the market demand not served by follower firms
D(P) - sf(p)
Who earns more profit in price leadership?
The leader earns more as it sets the market price
