Oligopoly 102-107

Question 1

Oligolopoly compared to perfect monop

Answer 1

+Barriers
-Fewer firms

Key diff!! Oligopolistic firms are are interdependent; price change by one firm is met w/ a price change by another firm; D curve (represents P) for a product is directly effected interdependently

Question 2

Oligopoly assumptions (in order to understand how a P change by one firm in olig. effects D curve of others)

Answer 2

Four models (assumptions)

Kinked Demand Curve

Cournot Duopoly

Nash Equil (prisoners dilemma)

Stackelberg Dominant Firm Model

Question 3

Kinked Demand curve (assumes a firm +P, then others -P)

Answer 3

The ‘kink’

A P2 > P1 is less elastic than P1>P0

Less elastic means a higher price but over a limited Q

So if a firm +P, others will instead take adv. of +Q, but -P, eliminating market share from higher P firm

Kink disadv: Does not determine market P

Question 4

Cournout Duopoly Model (Qs depends on the actions, reactions of other firms; strategic games)

Answer 4

Duopoly, same MC’s of prod.

Either firm uses last quarter Qs, so they change Qs next period until they’re equal which results in a market P less than monopoly but more than MC (perfect comp)

remember that! Perfect comp P is < Monop > MC

Question 5

Nash Equilibrium

Answer 5

Choices take place until no other firm can +econ profits or decrease losses

Prisoners Dilema: Nash Equil for Oligopoly is for both firms to cheat on a ‘collusion’ agreement by charging lowerP, but best outcome is for both to honor the agreement.

Collusion; contract to increase price: successfull if fewer firms, similar products, cost structures, small and frequent purchases

Question 6

Dominant Firm Model

Answer 6

Dominant firm (greater scale, lower cost structure = larger market share)

Dominant firm produces a Q much > than competitive firms

If comp. firms -P, dominant firm will -P and firms will exit because they can’t cover MC which free’s up market share, esp. to dominant firm

Question 7

Imp. Olig. Point

Answer 7

Firms decisions are interdependent so that the expected reaction of other firms is an important consideration.

Resulting price - Below Monop P, above perfect comp P (so above MC)

Question 8

Collusion vs. perfect comp

Answer 8

Qs competition;D=MC > Qs collusion;MC=MR, but P collusion; D=MC=MR > P competition; MC = D