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Questions and Answers
In oligopoly, what do firms need to estimate about their rivals?
In oligopoly, what do firms need to estimate about their rivals?
What is a characteristic of the Cournot model?
What is a characteristic of the Cournot model?
What is the outcome of the Bertrand model in homogeneous markets?
What is the outcome of the Bertrand model in homogeneous markets?
What is the focus of the Bertrand model?
What is the focus of the Bertrand model?
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What is the principle that firms may follow in the Hotelling model?
What is the principle that firms may follow in the Hotelling model?
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What is the outcome of the Hotelling model in terms of firm locations?
What is the outcome of the Hotelling model in terms of firm locations?
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What is a characteristic of oligopoly?
What is a characteristic of oligopoly?
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What is the term for the speculation about how rivals will respond to a firm's actions?
What is the term for the speculation about how rivals will respond to a firm's actions?
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What is the type of competition in the Bertrand model?
What is the type of competition in the Bertrand model?
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What is the name of the model that explores horizontal differentiation?
What is the name of the model that explores horizontal differentiation?
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Study Notes
Understanding Oligopoly Models
- Oligopoly is characterized by a small number of large firms, leading to interdependence in decision-making.
- In oligopoly, each firm's actions depend on its conjecture about rivals' reactions, influencing decisions on pricing and output.
Conjectural Variation
- Firms in oligopoly must estimate how rivals will respond to their actions, known as conjectural variation.
- Conjectural variation shapes firms' strategies, as seen in the Cournot model.
Extremes in Oligopoly
- Oligopoly can be viewed through two extremes: pure independent action and pure collusion.
- Pure independent action involves unilateral decisions by firms, while pure collusion entails coordinated actions among rivals.
Cournot Model
- In the Cournot model, firms compete by setting quantities.
- Equilibrium occurs when firms' expectations about rivals' outputs align with reality, leading to consistent market prices.
Bertrand Model
- The Bertrand model focuses on price competition, where each firm sets its price to capture market share.
- Equilibrium often results in competitive pricing, similar to perfect competition.
- In homogeneous markets, firms may compete aggressively on price, leading to prices converging towards marginal costs.
Implications of Bertrand Competition
- The Bertrand model is relevant in industries like airlines, where price competition is intense.
Hotelling Model
- The Hotelling model explores horizontal differentiation, where firms' locations along a linear market affect consumer choices.
- Equilibrium locations are determined by balancing proximity to consumers with competitive advantage.
Principle of Minimum Differentiation
- Under the Hotelling model, firms may choose locations to minimize differentiation, leading to spatial clustering and limited competition based on location.
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Description
Understand the concept of oligopoly, interdependence, and conjectural variation in microeconomics. Learn how firms estimate rival responses to their actions.
