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?

<p>Constant negative slope (C)</p> Signup and view all the answers

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

<p>Incorporates product differentiation (A)</p> Signup and view all the answers

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

<p>Firms compete primarily on prices (D)</p> Signup and view all the answers

What does the Edgeworth Duopoly Model emphasize?

<p>Output variations based on demand (B)</p> Signup and view all the answers

Why is the systematic analysis of oligopoly considered difficult?

<p>Because of firms' unpredictable actions and reactions (D)</p> Signup and view all the answers

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

<p>QQ3 (C)</p> Signup and view all the answers

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

<p>OP1 (C)</p> Signup and view all the answers

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

<p>Chamberlin's Model (A)</p> Signup and view all the answers

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

<p>Entry of new firms (C)</p> Signup and view all the answers

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

<p>The rival's price (B)</p> Signup and view all the answers

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

<p>Emphasizes price competition (C)</p> Signup and view all the answers

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

<p>Reaction Function (B)</p> Signup and view all the answers

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

<p>Lack of knowledge about market demand (A)</p> Signup and view all the answers

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

<p>3/8 (D)</p> Signup and view all the answers

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

<p>Supply 3/8 of the market (C)</p> Signup and view all the answers

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

<p>Increases its supply to 1/2 (A)</p> Signup and view all the answers

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

<p>1/3 each (B)</p> 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?

<p>1/3 (A)</p> 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?

<p>Q/(n+1) (D)</p> Signup and view all the answers

What is a common criticism of Cournot's model?

<p>It is based on unrealistic behavior assumptions (A)</p> 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?

<p>1/3 for A and 1/3 for B (C)</p> Signup and view all the answers

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

<p>A is the only seller in the market. (C)</p> Signup and view all the answers

What outcome occurs when B enters the market?

<p>B sets his price slightly below A’s price. (A)</p> Signup and view all the answers

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

<p>A's decision to lower prices after observing B's actions. (B)</p> Signup and view all the answers

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

<p>Price OP1 is not stable and leads to continuous fluctuations. (D)</p> Signup and view all the answers

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

<p>B identifies an opportunity for higher profit. (B)</p> Signup and view all the answers

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

<p>Prices fluctuate indefinitely within a range. (A)</p> Signup and view all the answers

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

<p>They engage in a series of competitive price adjustments. (C)</p> Signup and view all the answers

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

<p>Sellers lowering their prices to gain a competitive edge. (D)</p> Signup and view all the answers

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

<p>Costs of production are zero. (D)</p> Signup and view all the answers

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

<p>Firms are interdependent and aware of each other's output decisions. (B)</p> Signup and view all the answers

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

<p>Firms charge the monopoly price to maximize profits. (D)</p> Signup and view all the answers

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

<p>They will reach a stable industry equilibrium at monopoly price. (A)</p> Signup and view all the answers

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

<p>Firms can freely enter the market at any time. (C)</p> Signup and view all the answers

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

<p>It produces output where marginal revenue equals marginal cost. (B)</p> Signup and view all the answers

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

<p>The possibility of long-term price adjustments. (C)</p> Signup and view all the answers

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

<p>It posits that harmful competition is avoided through mutual awareness. (D)</p> Signup and view all the answers

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

<p>Different combinations of prices yielding the same profit. (D)</p> Signup and view all the answers

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

<p>A may either raise or lower its price. (A)</p> Signup and view all the answers

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

<p>It is where the reaction curves of firms A and B intersect. (D)</p> Signup and view all the answers

What critique is commonly associated with Bertrand's model?

<p>It falsely claims that firms adapt from past experiences. (D)</p> Signup and view all the answers

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

<p>They are convex to its own price axis. (D)</p> Signup and view all the answers

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

<p>Rival’s prices remain constant. (A)</p> Signup and view all the answers

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

<p>Price adjustments cannot occur beyond this point. (B)</p> 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?

<p>A is gaining market from firm B. (D)</p> Signup and view all the answers

Flashcards

Cournot's Duopoly Model

A model where two firms compete by simultaneously choosing output levels, assuming their competitor's output will remain constant.

Duopoly

A market structure with only two firms selling a similar product.

Oligopoly

A market structure with a few firms, where each firm's actions affect other firms in the industry.

Constant Negative Slope Demand Curve

A demand curve that shows a consistent inverse relationship between price and quantity demanded.

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Zero Marginal Cost

The cost of producing one more unit of a good or service is zero.

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Simultaneous Output Decisions

Each firm in a duopoly chooses their output level without knowing the competitor's decisions at the same time.

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Unreached Market Share

Cournot's model postulates that one-third of the total market remains unsold, resulting from firms optimizing output under certain assumptions.

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Assumptions in Cournot's model

Two firms, zero marginal cost, constant negative slope demand curve, and competitors' unchanging price and output decisions when a firm changes their own decisions.

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Cournot's Model: Assumptions

Cournot's model of duopoly makes several assumptions, including two firms with zero marginal costs, a constant negative slope demand curve, and firms making output decisions assuming their competitors' output remains unchanged. These assumptions help simplify the analysis.

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Cournot's Model: Reaction & Adjustment

In Cournot's model, each firm reacts to the other's output decisions. This leads to a process of adjustment where both firms try to maximize their profits by changing their output levels, assuming the other firm won't adjust.

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Cournot's Model: Stable Equilibrium

Cournot's model predicts a stable equilibrium where both firms supply one-third of the market each. At this point, neither firm can further increase their market share by changing their output.

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Cournot's Model: Unsupplied Market Share

In Cournot's equilibrium, a part of the market remains unsupplied. This occurs because firms are individually optimizing their output, and the combined output of the two firms doesn't meet the full market demand.

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Cournot's Model: Oligopoly Extension

Cournot's model can be extended to a market with more than two firms (oligopoly). The equilibrium point occurs where each firm supplies an equal share of the market, with a portion of the market remaining unsupplied.

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Cournot's Model: Criticism

Cournot's model has been criticized because it assumes firms don't learn from past actions. In reality, businesses compete dynamically, adapting their strategies. This means their predictions about competitors might be incorrect.

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Interdependence in Oligopoly

Firms in an oligopoly market are aware that their actions, such as changing prices or output, will impact their competitors and vice versa.

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Chamberlin's Duopoly Assumption

Chamberlin assumes that firms in a duopoly are not naive and learn from past experiences. Therefore, they are aware of their interdependence.

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Price War Avoided

Chamberlin argues that due to the interdependence in an oligopoly, firms will avoid price wars because they understand the detrimental effects on their own profits.

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Stable Equilibrium in Oligopoly

According to Chamberlin, the recognition of interdependence in an oligopoly will lead to a stable equilibrium where firms avoid harmful competition and charge a monopoly price.

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Maximizing Profits in Oligopoly

When firms in an oligopoly are aware of their mutual dependence and learn from experience, they will choose to charge the monopoly price to maximize individual and collective profits.

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Chamberlin's Duopoly Model Setup

Chamberlin assumes a linear demand curve and zero production costs to analyze the interdependence of two firms in a duopoly market.

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Firm A's Monopoly Price

In Chamberlin's model, when firm A enters the market first, it will produce the output level where its marginal revenue equals marginal cost (zero in this case). This results in a monopoly price for the firm.

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Bertrand's Duopoly Model

A model of duopoly where firms compete by setting prices, assuming their rival's price will stay constant.

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Reaction Function

A curve showing how one firm's optimal price changes in response to changes in a rival firm's price.

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Iso-profit Curve

A curve showing all combinations of prices charged by two firms that result in the same profit for one firm.

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Price Competition

Firms focus on lowering their prices to attract customers and gain market share.

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Bertrand Model: Assumption

Instead of output, each firm decides its price assuming the rival's price remains constant.

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Bertrand Model: Difference from Cournot

In Cournot, firms assume rival's output remains constant, while in Bertrand, firms assume rival's price remains constant.

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Bertrand Model: Focus

This model focuses on how price competition affects market outcomes.

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Bertrand Model: Analytical Tools

Uses reaction functions and iso-profit curves to analyze the interaction between duopolists.

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Concave Iso-profit Curve

An iso-profit curve that bends inwards towards the price axis; a higher price for one firm yields a lower price for the other to maintain the same profit.

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Convex Iso-profit Curve

An iso-profit curve that bends outwards away from the price axis; a higher price for one firm allows for a higher price for the other to maintain the same profit.

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Reaction Curve: Firm A

A curve showing the optimal price of firm A in response to different prices set by firm B, to maximise A's profit.

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Reaction Curve: Firm B

A curve showing the optimal price of firm B in response to different prices set by firm A, to maximise B's profit.

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Bertrand Equilibrium

A point where both firms' reaction curves intersect, representing a stable equilibrium where neither firm can increase profits by unilaterally changing its price.

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Stable Equilibrium in Bertrand Model

If either firm deviates from the Bertrand equilibrium point, a chain of price adjustments will occur, ultimately leading both firms back to the equilibrium point.

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Criticism of Bertrand Model

The model is criticized for its unrealistic assumption that firms never learn from past experiences and for the lack of a stable price solution when costs are zero.

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What is Edgeworth's Duopoly Model?

Edgeworth's model describes a duopoly where firms engage in price wars, leading to unstable prices and outputs.

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Price-War in Edgeworth's Model

In Edgeworth's model, price wars occur when each firm lowers its price to outcompete the other, leading to a cyclical pattern of price fluctuations.

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Unstable Equilibrium

Edgeworth's model suggests that in a duopoly, there is no stable equilibrium point where prices and outputs remain constant.

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Why is the Price Not Stable?

The price is not stable in Edgeworth's model because each firm sees an opportunity to raise its price, thinking the other firm will not react. This triggers a new round of price competition.

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What are the Key Players?

Edgeworth's model focuses on two sellers, A and B, who both have the capacity to produce and sell their goods.

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What is the Assumption about Cost?

Edgeworth's model assumes that the firms have zero cost of production, simplifying the focus on price competition.

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Impact on Output

In Edgeworth's model, the price wars lead to fluctuating output levels as firms adjust their production based on changing market conditions.

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Is Edgeworth's Model Realistic?

While Edgeworth's model helps understand the potential for instability in a duopoly, it is a simplified model and may not fully capture the complex dynamics of real-world competition.

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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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Duopoly Models PDF

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.

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