Duopoly Models in Economics

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Questions and Answers

What is the main characteristic of a duopoly in economics?

No competition among sellers

At least two sellers in the market (correct)

Only one seller in the market

More than two sellers in the market

In Cournot's Duopoly Model, what assumption is made about the competitor's reaction?

Competitors will increase their output

Competitors will immediately react to price changes

Competitors will always lower their prices

Competitors will not react to price changes initially (correct)

According to Cournot’s Duopoly Model, what proportion of the market do both firms ultimately supply?

Two-thirds of the market each

One-third of the market each (correct)

All of the market

One-half of the market each

What does the demand curve in Cournot's Model illustrate?

Constant negative slope Signup and view all the answers

In the Chamberlin Duopoly Model, what is a key aspect compared to other duopoly models?

Incorporates product differentiation Signup and view all the answers

What is a defining feature of Bertrand’s Duopoly Model?

Firms compete primarily on prices Signup and view all the answers

What does the Edgeworth Duopoly Model emphasize?

Output variations based on demand Signup and view all the answers

Why is the systematic analysis of oligopoly considered difficult?

Because of firms' unpredictable actions and reactions Signup and view all the answers

What output level does Firm B decide to produce after realizing it cannot sell at the monopoly price?

QQ3 Signup and view all the answers

What is the resulting price in the market when Firm B reduces its output to QQ3?

OP1 Signup and view all the answers

Which model assumes that firms behave in a way to reach a monopoly solution through recognizing interdependence?

Chamberlin's Model Signup and view all the answers

What major factor does Chamberlin’s model overlook in oligopolistic markets?

Entry of new firms Signup and view all the answers

In Bertrand's model, what do firms assume remains constant while determining their prices?

The rival's price Signup and view all the answers

Which of the following best describes Bertrand's model of duopoly?

Emphasizes price competition Signup and view all the answers

What analytical tool in Bertrand's model represents the relationship between prices charged by rival firms?

Reaction Function Signup and view all the answers

What is a key limitation noted in the Chamberlin's model regarding achieving monopoly output?

Lack of knowledge about market demand Signup and view all the answers

What market share does firm A have after the entry of firm B?

3/8 Signup and view all the answers

What profit maximization strategy does firm A adopt upon B's entry?

Supply 3/8 of the market Signup and view all the answers

How does firm B react to A's decision to supply 3/8 of the market?

Increases its supply to 1/2 Signup and view all the answers

At what point do firms A and B reach equilibrium in market share according to Cournot's model?

1/3 each Signup and view all the answers

What is the stable equilibrium value of market share for each firm in a Cournot oligopoly with three sellers?

1/3 Signup and view all the answers

What is the general formula for determining the share of each seller in an oligopolistic market with n sellers?

Q/(n+1) Signup and view all the answers

What is a common criticism of Cournot's model?

It is based on unrealistic behavior assumptions Signup and view all the answers

What is the final market share for firms A and B after successive rounds of adjustments according to Cournot's model?

1/3 for A and 1/3 for B Signup and view all the answers

What initial assumption is made about Seller A in Edgeworth's model?

A is the only seller in the market. Signup and view all the answers

What outcome occurs when B enters the market?

B sets his price slightly below A’s price. Signup and view all the answers

What triggers the price-war between Sellers A and B?

A's decision to lower prices after observing B's actions. Signup and view all the answers

What does Edgeworth's model suggest about price stability at OP1?

Price OP1 is not stable and leads to continuous fluctuations. Signup and view all the answers

What motivates Seller B to raise his price in the market?

B identifies an opportunity for higher profit. Signup and view all the answers

What is indicated by the phrase 'equilibrium is unstable and indeterminate' in Edgeworth's model?

Prices fluctuate indefinitely within a range. Signup and view all the answers

In Edgeworth's model, how do sellers react to each other's pricing strategies?

They engage in a series of competitive price adjustments. Signup and view all the answers

What does 'price-cutting' refer to in the context of Edgeworth's model?

Sellers lowering their prices to gain a competitive edge. Signup and view all the answers

What assumption about costs is made in Chamberlin's Duopoly Model?

Costs of production are zero. Signup and view all the answers

What is a key characteristic of firms in Chamberlin's Duopoly Model?

Firms are interdependent and aware of each other's output decisions. Signup and view all the answers

How does Chamberlin's model suggest firms behave in terms of pricing?

Firms charge the monopoly price to maximize profits. Signup and view all the answers

What outcome does Chamberlin envision for oligopolistic firms recognizing mutual dependence?

They will reach a stable industry equilibrium at monopoly price. Signup and view all the answers

Which of the following does Chamberlin NOT assume in his model?

Firms can freely enter the market at any time. Signup and view all the answers

In Chamberlin’s Duopoly Model, what happens when firm A first enters the market?

It produces output where marginal revenue equals marginal cost. Signup and view all the answers

What does Chamberlin rule out in his analysis of oligopolistic markets?

The possibility of long-term price adjustments. Signup and view all the answers

How does Chamberlin’s model differ from the classical models regarding competition?

It posits that harmful competition is avoided through mutual awareness. Signup and view all the answers

What do the iso-profit curves of firm A represent in relation to its prices?

Different combinations of prices yielding the same profit. Signup and view all the answers

What happens to firm A's price when firm B reduces its price?

A may either raise or lower its price. Signup and view all the answers

How is the equilibrium point E determined in the context of duopolists according to Bertrand's model?

It is where the reaction curves of firms A and B intersect. Signup and view all the answers

What critique is commonly associated with Bertrand's model?

It falsely claims that firms adapt from past experiences. Signup and view all the answers

What characterizes the iso-profit curves of firm B in Figure 4?

They are convex to its own price axis. Signup and view all the answers

According to Edgeworth's Duopoly Model, what assumption do sellers make about their rival’s pricing?

Rival’s prices remain constant. Signup and view all the answers

What is said to happen at point b on firm A's iso-profit curve?

Price adjustments cannot occur beyond this point. Signup and view all the answers

In the context of their iso-profit curves and market behavior, what does a rightward slant of A's reaction curve indicate?

A is gaining market from firm B. Signup and view all the answers

Study Notes

Types of Duopoly Models

Oligopoly analysis is difficult due to unpredictable firm behavior.
Economists created models based on behavioral assumptions.
Duopoly is a special case of oligopoly, with only two sellers.
Duopoly is a limiting case for oligopoly as there must be 2 or more sellers.

Cournot's Duopoly Model

Developed by Augustin Cournot in 1838.
Assumed two firms each owning an artesian mineral water well.
Both operate at zero marginal cost.
Both face a demand curve with a constant negative slope.
Each seller assumes their competitor will not react to price changes (Cournot's behavioral assumption).
Each seller ultimately supplies one-third of the market and charges the same price.

Chamberlin's Duopoly Model

Recognizes interdependence between firms.
Firms learn from past experience.
Assumes homogeneous products, equal size firms, and identical costs.
No entry by new firms and perfect knowledge of demand.
Firms are aware that their output/price changes will affect other firms.
Firms will avoid price wars.

Bertrand's Duopoly Model

Developed by Bertrand (1883).
Firms focus on price competition, not output.
Firms assume their rival's price will remain constant.
Firms use reaction functions (derived from iso-profit curves) for various price combinations.
Results in an equilibrium where each firm produces one-half of the market share at the monopoly price.

Edgeworth's Duopoly Model

Developed in 1897.
Sellers assume the rival's price will remain constant.
Each firm has a maximum output capacity.
Price wars develop as firms match each other's prices.
Equilibrium is unstable and indeterminate.

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Description

This quiz explores various duopoly models including Cournot's and Chamberlin's. It examines the characteristics of duopoly as a special case of oligopoly, focusing on the assumptions and behaviors of firms. Test your understanding of these economic concepts and their implications.