Podcast
Questions and Answers
At what production level does Firm 1 maximize its profit in the Cournot model?
At what production level does Firm 1 maximize its profit in the Cournot model?
- 4 units
- 3 units
- 5 units (correct)
- 6 units
What occurs in the market as the number of firms increases from a monopoly to a duopoly?
What occurs in the market as the number of firms increases from a monopoly to a duopoly?
- Price increases
- Profit for each firm increases
- Each individual firm produces less (correct)
- Total industry output decreases
What defines the Nash Equilibrium in the context of the Cournot model?
What defines the Nash Equilibrium in the context of the Cournot model?
- When both firms produce the same quantity (correct)
- When both firms produce at marginal cost
- When total industry profit is maximized
- When both firms produce different quantities
What is one significant difference between the Cournot and Bertrand models?
What is one significant difference between the Cournot and Bertrand models?
In a Cournot model, how does firm B typically respond if firm A increases its output?
In a Cournot model, how does firm B typically respond if firm A increases its output?
In the Bertrand equilibrium, what happens to the prices as firms compete?
In the Bertrand equilibrium, what happens to the prices as firms compete?
What is the expected outcome when a firm in a Bertrand duopoly raises its price?
What is the expected outcome when a firm in a Bertrand duopoly raises its price?
Which type of merger involves firms operating in entirely unrelated markets?
Which type of merger involves firms operating in entirely unrelated markets?
In a three-firm oligopoly, what is the likely rational response for firm 3 when firm 1 increases output and firm 2 maintains its output?
In a three-firm oligopoly, what is the likely rational response for firm 3 when firm 1 increases output and firm 2 maintains its output?
What is a potential long-term outcome of intense price competition in the Bertrand model?
What is a potential long-term outcome of intense price competition in the Bertrand model?
What significantly characterizes a Nash Equilibrium in an oligopoly?
What significantly characterizes a Nash Equilibrium in an oligopoly?
What happens to overall industry profit as more firms enter the market according to oligopoly theory?
What happens to overall industry profit as more firms enter the market according to oligopoly theory?
How does market concentration typically impact oligopoly behavior?
How does market concentration typically impact oligopoly behavior?
What would be a typical outcome of a merger between two firms in an oligopoly?
What would be a typical outcome of a merger between two firms in an oligopoly?
In vertical differentiation, how do consumers typically perceive different quality levels?
In vertical differentiation, how do consumers typically perceive different quality levels?
What is the nature of horizontal differentiation in product offerings?
What is the nature of horizontal differentiation in product offerings?
What does Cournot Equilibrium focus on in an oligopoly?
What does Cournot Equilibrium focus on in an oligopoly?
Which type of equilibrium emphasizes price in an oligopoly?
Which type of equilibrium emphasizes price in an oligopoly?
What is the primary effect of mergers on market power?
What is the primary effect of mergers on market power?
In the context of product differentiation, what is a firm's main goal?
In the context of product differentiation, what is a firm's main goal?
How is Nash Equilibrium described in scenarios with multiple firms?
How is Nash Equilibrium described in scenarios with multiple firms?
What was a significant outcome of the merger between two large hospital chains in 2007?
What was a significant outcome of the merger between two large hospital chains in 2007?
What does mixed strategies refer to in the context of Nash Equilibrium?
What does mixed strategies refer to in the context of Nash Equilibrium?
What is one potential negative consequence of mergers in the health care sector?
What is one potential negative consequence of mergers in the health care sector?
Flashcards
Mergers & Efficiency
Mergers & Efficiency
Mergers can increase efficiency by reducing waste, improving production, or using economies of scale.
Mergers & Market Power
Mergers & Market Power
Mergers can increase a firm's market power, potentially leading to higher prices due to reduced competition.
Product Differentiation
Product Differentiation
Making a product unique to stand out from competitors, to gain market share and charge higher prices.
Nash Equilibrium
Nash Equilibrium
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Bertrand Equilibrium
Bertrand Equilibrium
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Cournot Equilibrium
Cournot Equilibrium
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Mixed Strategies
Mixed Strategies
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Cournot Equilibrium
Cournot Equilibrium
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Bertrand Equilibrium
Bertrand Equilibrium
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Homogenous Goods
Homogenous Goods
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Conglomerate Merger
Conglomerate Merger
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Horizontal Merger
Horizontal Merger
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Vertical Merger
Vertical Merger
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Heterogeneous Goods
Heterogeneous Goods
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Homogeneous Goods
Homogeneous Goods
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Horizontal Differentiation
Horizontal Differentiation
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Location Game
Location Game
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Market Concentration
Market Concentration
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Rational Expectations
Rational Expectations
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Vertical Differentiation
Vertical Differentiation
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Efficiency in Locations (2 player game)
Efficiency in Locations (2 player game)
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Cournot Equilibrium (Reaction)
Cournot Equilibrium (Reaction)
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3 Firms Reaction (One firm increases output)
3 Firms Reaction (One firm increases output)
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3 Firms Reaction (Output decrement same)
3 Firms Reaction (Output decrement same)
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Bertrand Equilibrium (Price)
Bertrand Equilibrium (Price)
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3 Firms Reaction (Bertrand, Price Raise)
3 Firms Reaction (Bertrand, Price Raise)
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Study Notes
Oligopoly
- Oligopoly is a market with a few large firms.
- Game theory is used to understand how large firms behave.
- Cournot equilibrium and Bertrand equilibrium describe how firms behave in oligopoly.
- American industries are highly concentrated, with many industries having a small number of firms holding significant market share.
- Examples include pacemakers (89% market share by a few firms), baby formula (69%), and dry cat food (57%).
Cournot Equilibrium
- Duopoly (two firms) is the simplest oligopoly case.
- Firms produce identical products.
- Demand curve is given by P = 20 - Q
- Marginal cost is MC = 9 (constant)
- Profit-maximizing quantity for a monopoly scenario is found in a table (Quantity is 6 with a corresponding price of 14 and profit of 30).
- Assuming one firm produces 3 units, the residual demand for the second firm is given as P=17-Q.
- Profit maximization for firms, assuming a fixed output for the other firm, leads to various firm outputs in a table.
- Firm output is somewhere between 4 and 5 units based on profit maximizing calculations, assuming the first firm produces 3 units.
Bertrand Equilibrium
- Price is the strategic variable.
- Firms produce identical products.
- If one firm has a lower price, it captures the entire market.
- Firms undercut each other to gain market share.
- Equilibrium price is marginal cost.
- In the homogeneous product case, the equilibrium price reaches marginal cost.
Mergers
- Mergers combine two or more firms.
- Types of mergers include:
- Conglomerate mergers: Firms in unrelated industries.
- Horizontal mergers: Firms in the same industry.
- Vertical mergers: Firms that are customers or suppliers.
- Mergers can lead to efficiency gains (lower costs) or increase market power (higher prices).
- A significant amount of data suggests that efficiency benefits from mergers are not statistically significant but that increased prices are.
Product Differentiation
- Firms offer slightly different products.
- This allows for higher prices than marginal cost.
- Location choices influence which firms are preferred.
- Location strategies play a critical role in product differentiation.
- Competition is influenced by the availability of competing products.
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