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?

<p>Bertrand is more competitive than Cournot due to price undercutting (B)</p> Signup and view all the answers

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

<p>Firm B's output remains unchanged as it tries to maintain stability. (B)</p> Signup and view all the answers

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

<p>Prices decrease to marginal cost (D)</p> Signup and view all the answers

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

<p>The rival will lower its price to attract more customers. (A)</p> Signup and view all the answers

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

<p>Conglomerate merger (B)</p> 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?

<p>Firm 3 will maintain its current output in hopes the market stabilizes. (B)</p> Signup and view all the answers

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

<p>Zero profits for firms (D)</p> Signup and view all the answers

What significantly characterizes a Nash Equilibrium in an oligopoly?

<p>Every firm optimizes its strategy based on the strategies chosen by the others. (D)</p> Signup and view all the answers

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

<p>It decreases with larger competition (A)</p> Signup and view all the answers

How does market concentration typically impact oligopoly behavior?

<p>Higher concentration usually leads to more aggressive price competition among firms. (A)</p> Signup and view all the answers

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

<p>Greater market power and potential for price fixing. (C)</p> Signup and view all the answers

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

<p>Some consumers may favor lower quality due to cost considerations. (B)</p> Signup and view all the answers

What is the nature of horizontal differentiation in product offerings?

<p>Variants differ, but no one variant is viewed as superior. (D)</p> Signup and view all the answers

What does Cournot Equilibrium focus on in an oligopoly?

<p>Quantity as the strategic variable (D)</p> Signup and view all the answers

Which type of equilibrium emphasizes price in an oligopoly?

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

What is the primary effect of mergers on market power?

<p>They can increase market power leading to higher prices. (D)</p> Signup and view all the answers

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

<p>To charge higher prices and gain market share. (D)</p> Signup and view all the answers

How is Nash Equilibrium described in scenarios with multiple firms?

<p>Firms employ mixed strategies and may change location. (B)</p> Signup and view all the answers

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

<p>Increased costs for patients and insurance companies. (D)</p> Signup and view all the answers

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

<p>Firms varying their strategies and locations dynamically. (D)</p> Signup and view all the answers

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

<p>Worsening quality of health care. (B)</p> Signup and view all the answers

Flashcards

Mergers & Efficiency

Mergers can increase efficiency by reducing waste, improving production, or using economies of scale.

Mergers & Market Power

Mergers can increase a firm's market power, potentially leading to higher prices due to reduced competition.

Product Differentiation

Making a product unique to stand out from competitors, to gain market share and charge higher prices.

Nash Equilibrium

A stable state where no firm can improve its outcome by changing its strategy.

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Bertrand Equilibrium

In oligopoly, equilibrium where firms compete by changing prices.

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Cournot Equilibrium

In oligopoly, equilibrium where firms compete by changing quantities.

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Mixed Strategies

In a Nash equilibrium, companies might not have a fixed strategy, like constantly moving

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Cournot Equilibrium

A Nash equilibrium in an oligopoly where firms compete by choosing quantities, not prices.

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Bertrand Equilibrium

A Nash equilibrium in an oligopoly where firms compete by setting prices, not quantities. Prices typically fall to marginal cost.

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Homogenous Goods

Identical products offered by competing firms

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Conglomerate Merger

Merger between companies in unrelated industries.

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Horizontal Merger

Merger between firms in the same industry.

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Vertical Merger

Merger between a firm and its supplier or customer.

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Heterogeneous Goods

Goods that differ in characteristics like taste, color, or location.

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Homogeneous Goods

Goods that are identical in every relevant characteristic.

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Horizontal Differentiation

Different goods, with no clear "better" option, just different preferences.

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Location Game

A game where firms strategically choose locations.

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Market Concentration

Measure of how many firms are in a specific market.

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Rational Expectations

Expectations that are correct in the model.

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Vertical Differentiation

Goods that vary in quality (e.g., one good is better than another, objectively).

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Efficiency in Locations (2 player game)

How locations can be most efficient, considering (transportation) costs of customers.

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Cournot Equilibrium (Reaction)

How one firm reacts when another firm increases output.

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3 Firms Reaction (One firm increases output)

Firms reaction of another (rational) firm when another firm increases output, while other keeps constant.

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3 Firms Reaction (Output decrement same)

Rational reaction from firm 3 if firm 1 increases output and firm 2 decreases by same amount.

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Bertrand Equilibrium (Price)

Firms competing in price in a duopoly (2 firms).

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3 Firms Reaction (Bertrand, Price Raise)

Rational reaction for firm 1 if firm 2 raises the price.

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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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Chap 11: Oligopoly - An Introductory Course in Economics PDF

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