Week 9

Question 1

describe oligopoly

Answer 1

• a market with many buyers and few sellers
• characterised by strategic interaction

Question 2

what is a cartel

Answer 2

• group of independent market participants who collude with eachother in order to improve their profits and dominate the market (illegal)
• world best known cartel is OPEC, control oil production

Question 3

what are the weaknesses of tit for tat strategy

Answer 3

• greatly weakened when more than 2 players in the game
• if there are only 2 firms, these firms realise that other firms may enter industry

Question 4

what are the 2 models

Answer 4

Firms may either:
- Decide on a level of output, allowing markets to determine price, or
- Decide on price and allow markets to determine the volume of sales
- The Cournot model is a market where firms choose output levels
- The Bertrand model is a market where firms decide on price

Question 5

describe the cournot model

Answer 5

• focus on a duopoly (but can be applied to multiple producers)
• assume: highly substitutable products, firms have same tech and face same input costs, constant unit costs and straight line market demand curve

Question 6

what is the reaction function

Answer 6

• the best response of a player
• for firms, it is one that yields highest profit

Question 7

what is the courtnot equilibrium

Answer 7

• each firm is setting MC equal to (residual) MR
• diagram on week 9 slide 33

Question 8

describe the bertrand model

Answer 8

• oligopolistic strategies based around price setting
• firms compete on price, allowing market to determine volume sold at that price
• undercutting prices
• any firm can do this as long as the price is not beneath their MC

Question 9

describe the bertrand paradox

Answer 9

for 2 similar firms producing highly substitutable output, nash equilibrium in prices is P = MC

Question 10

when will the paradox not hold

Answer 10

• firms have capacity constraints and output cannot increase sufficiently for price to be driven down to cost
• product differentiation means that the firms’ products aren’t highly substitutable
• firms understand that the short-term gain from undercutting leads to falling profits in the long term

Question 11

what are the 5 sources of market power

Answer 11

• exclusive control over import inputs
• patents and copyrights
• gov licences or franchises
• economies of scales (natural monopolies)
• network economies