Oligopoly and Cournot Equilibrium in Economics

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Questions and Answers

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?

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?

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?

Bertrand is more competitive than Cournot due to price undercutting Signup and view all the answers

In a Cournot model, how does firm B typically respond if firm A increases its output?

Firm B's output remains unchanged as it tries to maintain stability. Signup and view all the answers

In the Bertrand equilibrium, what happens to the prices as firms compete?

Prices decrease to marginal cost Signup and view all the answers

What is the expected outcome when a firm in a Bertrand duopoly raises its price?

The rival will lower its price to attract more customers. Signup and view all the answers

Which type of merger involves firms operating in entirely unrelated markets?

Conglomerate merger Signup and view all the answers

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?

Firm 3 will maintain its current output in hopes the market stabilizes. Signup and view all the answers

What is a potential long-term outcome of intense price competition in the Bertrand model?

Zero profits for firms Signup and view all the answers

What significantly characterizes a Nash Equilibrium in an oligopoly?

Every firm optimizes its strategy based on the strategies chosen by the others. Signup and view all the answers

What happens to overall industry profit as more firms enter the market according to oligopoly theory?

It decreases with larger competition Signup and view all the answers

How does market concentration typically impact oligopoly behavior?

Higher concentration usually leads to more aggressive price competition among firms. Signup and view all the answers

What would be a typical outcome of a merger between two firms in an oligopoly?

Greater market power and potential for price fixing. Signup and view all the answers

In vertical differentiation, how do consumers typically perceive different quality levels?

Some consumers may favor lower quality due to cost considerations. Signup and view all the answers

What is the nature of horizontal differentiation in product offerings?

Variants differ, but no one variant is viewed as superior. Signup and view all the answers

What does Cournot Equilibrium focus on in an oligopoly?

Quantity as the strategic variable Signup and view all the answers

Which type of equilibrium emphasizes price in an oligopoly?

Bertrand Equilibrium Signup and view all the answers

What is the primary effect of mergers on market power?

They can increase market power leading to higher prices. Signup and view all the answers

In the context of product differentiation, what is a firm's main goal?

To charge higher prices and gain market share. Signup and view all the answers

How is Nash Equilibrium described in scenarios with multiple firms?

Firms employ mixed strategies and may change location. Signup and view all the answers

What was a significant outcome of the merger between two large hospital chains in 2007?

Increased costs for patients and insurance companies. Signup and view all the answers

What does mixed strategies refer to in the context of Nash Equilibrium?

Firms varying their strategies and locations dynamically. Signup and view all the answers

What is one potential negative consequence of mergers in the health care sector?

Worsening quality of health care. Signup and view all the answers

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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Description

This quiz covers the concepts of oligopoly, focusing on market structures dominated by a few large firms. It explores the principles of game theory, including Cournot and Bertrand equilibrium, and examines practical examples within American industries. Test your understanding of how firms interact in these concentrated markets.