Oligopoly and Market Structures
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Questions and Answers

Which of the following market structures have simple solutions for decision-making problems?

  • Monopolistic competition (correct)
  • Monopoly (correct)
  • Oligopoly
  • Perfect competition (correct)

    • What is the marginal revenue of EasyJet when they lower their price from £400 to £399?

  • £398 (correct)
  • £239,799
  • £399
  • £119,799

    • What is the change in total revenue for EasyJet when they lower their price from £400 to £399?

  • £239,799
  • £120,000
  • £119,799 (correct)
  • £398

    • What is the change in total revenue for RyanAir when they lower their price from £400 to £398?

    <p>£239,596 (C)</p> Signup and view all the answers

    Which of the following statements is true about the marginal revenue of EasyJet when they lower their price from £400 to £399?

    <p>It is greater than the marginal cost. (A)</p> Signup and view all the answers

    What is the marginal revenue of RyanAir when they lower their price from £400 £398?

    <p>£398 (B)</p> Signup and view all the answers

    Should EasyJet cut its fare further to £398 to sell more tickets?

    <p>No, because the marginal revenue is less than the marginal cost. (C)</p> Signup and view all the answers

    Should RyanAir reduce its price from £400 to £398?

    <p>Yes, because the marginal revenue is greater than the marginal cost. (D)</p> Signup and view all the answers

    What is the optimal pricing strategy for EasyJet?

    <p>To charge £399. (D)</p> Signup and view all the answers

    In the Prisoner's Dilemma game, if Firm A chooses an output of 20, what is the best output choice for Firm B to maximize its profit?

    <p>Q=15 (C)</p> Signup and view all the answers

    What is the total industry profit when both firms in the Prisoner's Dilemma game choose an output of 20?

    <p>£800 (C)</p> Signup and view all the answers

    The concept of 'collusion' in the context of oligopoly refers to:

    <p>Firms consciously coordinating their output and pricing decisions to maximize joint profits. (C)</p> Signup and view all the answers

    What is the Cournot-Nash equilibrium in the Prisoner's Dilemma game?

    <p>Q=20 for both firms (B)</p> Signup and view all the answers

    Which of the following is NOT a characteristic of a Nash equilibrium?

    <p>All players must be choosing the same strategy. (D)</p> Signup and view all the answers

    Which of the following is the key difference between Bertrand's and Cournot's models?

    <p>Bertrand's model focuses on price competition while Cournot's model focuses on quantity competition. (D)</p> Signup and view all the answers

    In Bertrand's model, what is the assumption about the consumer's behavior?

    <p>Consumers are price-sensitive and will always buy from the firm offering the lowest price. (D)</p> Signup and view all the answers

    What is the Nash equilibrium in the Bertrand duopoly model?

    <p>Both firms set their prices equal to their marginal cost. (C)</p> Signup and view all the answers

    What is one of the key assumptions of the Bertrand duopoly model?

    <p>Consumers are perfectly informed about prices. (B), Consumers are perfectly rational. (D), Firms cannot collude with each other. (H)</p> Signup and view all the answers

    What would happen to the Nash equilibrium in the Bertrand duopoly model if the firms' marginal costs were different?

    <p>The Nash equilibrium would be for the firm with the lower marginal cost to set its price slightly below the marginal cost of the firm with the higher marginal cost. (A)</p> Signup and view all the answers

    How does the Bertrand duopoly model differ from the Cournot duopoly model, in terms of the strategic variable?

    <p>Bertrand's model assumes firms compete on price, while Cournot's model assumes firms compete on quantity. (C)</p> Signup and view all the answers

    Assuming that RyanAir's current price is £400 per ticket, what is EasyJet's optimal pricing strategy to maximize its profit?

    <p>Set its price slightly lower than £400, for example at £399. (D)</p> Signup and view all the answers

    In Bertrand's model, the assumption of homogeneous products implies that:

    <p>The products offered by the two firms are completely identical. (E)</p> Signup and view all the answers

    What is the primary assumption of Cournot's model regarding its competitors' output?

    <p>Competitors will produce the same level of output as the previous period. (D)</p> Signup and view all the answers

    In the context of Cournot's model, what does the term 'residual demand curve' refer to?

    <p>The amount of demand that remains after firms have produced their outputs. (B)</p> Signup and view all the answers

    How does Firm B calculate its profit-maximizing output in the second period of Cournot's model?

    <p>Assuming Firm A's output will remain at the previous level. (B)</p> Signup and view all the answers

    What happens to Firm A's output decision when Firm B enters the market?

    <p>Firm A reduces its output due to price decrease. (B)</p> Signup and view all the answers

    What is the outcome for Firm A when it realizes Firm B is producing 15 units in the third period?

    <p>Firm A reassesses and adjusts its output level accordingly. (D)</p> Signup and view all the answers

    What is the price in the market if both firms' outputs total 60 units in the given scenario?

    <p>£40 (C)</p> Signup and view all the answers

    How does the market respond when Firm B maximizes profits based on Firm A's previous output?

    <p>It results in an unexpected drop in market price. (A)</p> Signup and view all the answers

    What can be inferred about the outputs of the firms in Cournot's model?

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

    During which period does Firm A operate as the only firm in the market?

    <p>Period 1 (D)</p> Signup and view all the answers

    What key factor drives the changes in output decisions between different periods in Cournot's model?

    <p>Historical outputs of competing firms. (A)</p> Signup and view all the answers

    What happens when Firm A's market price falls below its profit-maximizing price?

    <p>Firm A will decrease its output. (B)</p> Signup and view all the answers

    In the context of Cournot's model, how does Firm B respond to an increase in Firm A's output?

    <p>B recalculates its profit-maximizing output. (B)</p> Signup and view all the answers

    What is the significance of the ‘Cournot conjecture’ in market equilibrium?

    <p>It states that firms will eventually produce at their profit-maximizing outputs. (B)</p> Signup and view all the answers

    What is the profit maximization output level for Firm A when the market price is £62.60?

    <p>QA = 22.5 (B)</p> Signup and view all the answers

    What effect does a change in the demand curve have on the outputs of firms in a Cournot duopoly?

    <p>Both firms adjust their outputs based on the new demand. (A)</p> Signup and view all the answers

    When Firm B's profit appears to be £351.563, what assumption are they acting on?

    <p>QA = 22.5. (B)</p> Signup and view all the answers

    Which price would indicate Firm A's profit-maximizing price?

    <p>£62.50 (A)</p> Signup and view all the answers

    What does a market price rising above Firm B's profit-maximizing price indicate?

    <p>Firm B will increase its output. (B)</p> Signup and view all the answers

    At the equilibrium point in a Cournot duopoly, how are outputs typically expressed?

    <p>QA = QB. (D)</p> Signup and view all the answers

    What happens to Firm A's calculations if the market price continues to rise above its expectations?

    <p>Firm A may need to rethink its output level. (B)</p> Signup and view all the answers

    Study Notes

    Oligopoly

    • Oligopoly is a market structure where a few large firms dominate.
    • Firms compete, but also cooperate.
    • Often characterized by significant barriers to entry.
    • Produces above-normal profits.
    • Products can be differentiated or undifferentiated.

    Duopoly vs. Oligopoly

    • A duopoly is a specific type of oligopoly, with only two firms.
    • Examples of duopolies include Airbus vs. Boeing, or Coca-Cola vs. PepsiCo.
    • Examples of oligopolies include numerous firms such as Tobacco, Cars, Petrol companies, and utilities (such as Sainsbury's and Morrison's).

    The Oligopolist's Problem

    • Firms must anticipate rivals' reactions when making decisions about output, price, advertising, and product characteristics.
    • This strategic behavior is a complex process.

    Models of Oligopoly

    • Kinked demand curve model.
    • Cournot model.
    • Bertrand model.

    Kinked Demand Curve

    • This model assumes rivals will either match price increases or match price decreases.
    • This results in a discontinuous demand curve, challenging a simple profit maximization solution.

    Cournot Model

    • Assumes firms compete over output levels, with each firm predicting its rival’s reaction.
    • Each firm maximizes its profits based on its assumptions about rivals' behavior.
    • This model leads to the prediction that firms may increase output.

    Bertrand Model

    • Assumes firms compete by setting prices.
    • Firms set their price lower than their rival to take all the market share.
    • The model predicts that prices will fall to marginal cost in perfect competition.
    • Predicts competitive market outcomes are very different from the Cournot model.

    Nash Equilibrium

    • A set of strategies where no player has an incentive to unilaterally change their strategy.
    • If all firms in the market apply best response to others output choices, then it will converge to this point.
    • This can be applied to the Cournot's model, as firms anticipate and respond to rivals moves.

    Cournot Model Summary

    • Firms make decisions independently based on past rival’s output and assumptions about its behavior.
    • The Cournot model predicts a market equilibrium where price is below that of the monopoly price and total output is higher than that of the monopoly.

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    Description

    Explore the intricacies of oligopoly, including its characteristics, models, and the duopoly concept. Understand how firms in this market structure behave strategically and anticipate competitor actions. This quiz covers theoretical foundations and real-world applications.

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