Part II: Structural Analysis of the Industry II.2. Oligopoly : collusive and non-collusive models SLIDESHOW 7

Question 1

On what does the oligopoly theory rest?

Answer 1

Recognition of the importance of the # of firms in the industry and the nature of the product

Question 2

What is the central problem of oligopoly?

Answer 2

The recognition of the firms’ mutual dependence or interdependence

Question 3

What does interdependence mean?

Answer 3

A firm is aware that its own actions affect the actions of its rivals

Question 4

On what does game theory focus?

Answer 4

Uncertainty, interdependence, conflict and strategy

Question 5

What does game theory show?

Answer 5

It shows that decisions that may appear rational from each firm’s individual perspective can lead to outcomes that are sub-optimal

Question 6

What is a game that is played only once?

Answer 6

A single-period game

Question 7

What is a game that is played more than once?

Answer 7

A multiple-period or repeated game

Question 8

What is a player’s strategy?

Answer 8

A set of rules telling a player which action to choose under each possible set of circumstances

Question 9

What is a simultaneous game?

Answer 9

A game in which all players choose their actions simultaneously

Question 10

What is a sequential game?

Answer 10

A game in which the players choose their actions in turn

Question 11

What is the outcome of a game?

Answer 11

A set of strategies and actions that are actually chosen

Question 12

What is an equilibrium?

Answer 12

A combination of strategies, actions and payoffs that is optimal for all players

Question 13

What are the 2 types of games?

Answer 13

1\ Cooperative : players can negotiate a binding agreement

2\ Non-cooperative : when an agreement is not possible

Question 14

What is a constant-sum game?

Answer 14

Game classified according to its outcome, the sum of the payoffs to all players is always the same

Question 15

What is a non-constant sum game?

Answer 15

The sum of the payoffs depends on the strategies chosen

Question 16

What is a zero-sum game?

Answer 16

It is a constant-sum game in which the sum of the gains and losses of all players is always zero. For example : poker

Question 17

What is the key defining characteristic of a game?

Answer 17

The property of interdependence

Question 18

How is the best strategy for a player called?

Answer 18

The dominant strategy

Question 19

When both players have the same dominant strategy, in which situation do we find ourselves?

Answer 19

Nash equilibrium : neither player can improve his payoff given the strategy chosen by the other player

Question 20

What is a prisoner’s dilemma

Answer 20

There are gains to be made if the players collude

Question 21

What is a mixed strategy?

Answer 21

A game in which there are no dominant strategies

Question 22

What is a game tree?

Answer 22

In a sequential game, it is a map of choices facing the players

Question 23

What is another name for payoff matrix?

Answer 23

Strategic from representation

Question 24

What is a conjectural variation?

Answer 24

Assumptions a firm makes about the reactions it expects from its rivals in response to its own actions

Question 25

What is a solution to the oligopoly?

Answer 25

1\ Pure independent action | 2\ Pure collusion

Question 26

When does the possibility of collusion arise?

Answer 26

When multiple rival firms recognize their interdependence

Question 27

What are the 2 firms of bargaining?

Answer 27

1\ Explicit negotiations | 2\ Tacit behaviour

Question 28

What are the 2 models analyzing strategic interactions between firms?

Answer 28

1\ Model of price determination in duopoly (Bertrand) | 2\ Model of output determination in duopoly (Cournot)

Question 29

What happens in the Bertrand model?

Answer 29

Each firm sets its own price and then sells as much output as possible

Question 30

What are the characteristics in the Bertrand Model?

Answer 30

The output of the 2 firms is identical and there aren't any transaction or search costs.

Question 31

When does the price-cutting sequence in the Bertrand Model end?

Answer 31

When price falls to the perfectly competitive level Pc = Mc. Each firm captures a 50% share of the market at the Pc level

Question 32

What are the criticisms addressed to the Bertrand Model?

Answer 32

1\ Capacity constraint (Edgeworth) --> no stable equilibrium solution 2\ Lack of temporal dimension 3\ Homogeneity of the products 4\ Closed model

Question 33

What is objective differentiation?

Answer 33

Related to effective characteristics of the product (transportation costs, packaging...)

Question 34

What is subjective differentiation?

Answer 34

Related to the brand, the reputation

Question 35

In Cournot's Model, how do both firms maximize their own profit?

Answer 35

It is subject to the constraint that the other firm's output is fixed at its current level

Question 36

What is the Cournot-Nash equilibrium?

Answer 36

The point at which both firms are simultaneously located on their own reaction functions

Question 37

What is another solution to Cournot's duopoly model?

Answer 37

Stackelberg through the leader-follower model. In Cournot, each firm operate according to the zero conjectural variation assumption and fails to anticipate the other's reaction on each occasion it adjusts its own output

Question 38

What is an alternative of Stackelberg's solution?

Answer 38

A first-mover advantage

Question 39

How do we reach a Stackelberg disequilibrium?

Answer 39

If both firm simultaneously produce the higher level of output. At this point, there is overproduction and firms are forced to cut their prices in order to sell additional output. Both firms earn less profit than at the Cournot-Nash equilibrium

Question 40

Explain the different time frames between Cournot and Bertrand.

Answer 40

Cournot competitors choose capacities and then compete as capacity-constrained price setters. Production costs are sunk.

Question 41

What is the conclusion in the Cournot equilibrium outcome?

Answer 41

Positive profits and a price that exceeds marginal and average cost

Question 42

What is the specificity in Bertrand's Model?

Answer 42

Markets in which capacity is sufficiently flexible that firms can meet all of the demand that arises at the prices they announce

Question 43

What brings firms to collude?

Answer 43

Uncertainties and risks

Question 44

How is collusion seen?

Answer 44

Easing competitive pressure through unified action

Question 45

What did Machlup draw regarding collusion?

Answer 45

There is an important distinction between degrees of collusion and forms of collusion

Question 46

What are the 2 forms of collusion?

Answer 46

1\ no formal agreement | 2\ explicit agreements

Question 47

What are the 6 forms of informal collusion?

Answer 47

``` 1\ Industry tradition 2\ Informal expressions of opinion 3\ Exchange information about strategic decisions 4\ Trade association announcements 5\ Similar announcements 6\ Active participation of firms ```

Question 48

What are the 3 conditions describing a tacit collusion?

Answer 48

1\ Transparency 2\ Incentive for firms to stick to a common policy 3\ Potential entry and buyer reactions should not be seen by firms as potentially destabilizing threats

Question 49

What are the 2 main institutions to promote and organize cooperation between producers?

Answer 49

1\ Trade associations | 2\ Cartels

Question 50

Are trade associations tolerated by legal authorities?

Answer 50

They are if they foster competition or at least don't impede competition

Question 51

What is a cartel?

Answer 51

A form of organization adopted by firms in an oligopoly in an attempt to achieve a collusive outcome. they seek to enhance the monopoly power (Liefmann)

Question 52

What is a joint venture?

Answer 52

An association between multiple competing firms

Question 53

What are the 2 types of joint ventures?

Answer 53

1\ Consortium 2\ Syndicate --> Joint ventures stimulate innovation

Question 54

When are usually consortia established?

Answer 54

When firms undertake speculative activities (risk too high and thus discourage individual involvement)

Question 55

What are the 3 main reasons pushing firms to form joint ventures?

Answer 55

1\ Combine resources to increase efficiency 2\ Enter new market 3\ Develop joint R&D programmes

Question 56

When does a semi-collusion happen?

Answer 56

In the case it is difficult to formulate specific agreements covering all aspects of the firms' behaviour

Question 57

What is the last form of collusion?

Answer 57

State-sponsored collusion to promote rationalization