Oligopoly II

A firm that sets price to maximize its profits, taking into account the supply response of smaller firms.

The demand curve faced by the dominant firm, which is the difference between the total market demand and the combined supply of all smaller firms.

The price level at which smaller firms fully satisfy market demand. The dominant firm has no market at this price.

The price level at which smaller firms supply zero output. The dominant firm faces full market demand at this price.

The price level where the marginal revenue of the dominant firm equals its marginal cost. This is the profit-maximizing output level for the dominant firm.

A model of price competition in which firms produce homogeneous goods, treat each other's prices as fixed, and simultaneously decide what price to charge.

In a Bertrand model, the Nash equilibrium occurs when both firms set their price equal to marginal cost, resulting in zero profit for each firm.

In the Bertrand model, firms compete by setting lower prices to gain market share. This leads to a downward spiral of prices until they reach the level of average cost or constant marginal cost.

The Bertrand model explains how price competition can result in zero profit for firms in a market with homogeneous products.

A market situation where firms produce similar or identical products. In Bertrand models, firms with homogeneous products tend to drive prices down to marginal cost.

In the Bertrand model, firms set prices simultaneously, meaning they make decisions about their prices at the same time without knowing the other firm's choice.

When firms set prices, they take into account the prices set by their competitors. These prices are treated as fixed, meaning they are not expected to change during the process.

The additional cost of producing one more unit of a product.

In a game theory context, a Nash Equilibrium refers to a stable situation where neither player has an incentive to change their strategy, given what the other player is doing. In this example, it implies that both firms charging a price of 4 dollars represents a stable point, as neither firm can improve its profit by unilaterally changing its price.

A firm's reaction curve shows the optimal price a firm will choose for a given price set by its competitor. In this case, Firm 1's reaction curve shows the ideal price (P1) based on Firm 2's price (P2), and vice-versa.

When firms compete, they lower their prices to gain market share, leading to a decrease in profits. This is a characteristic of price competition, where firms focus on price strategies to attract customers.

In collusion, firms agree to set prices at a higher level, leading to higher profits. This can be unstable as one firm has an incentive to cheat by lowering its price to gain a larger market share, potentially upsetting the agreement.

When firms collude, they can charge higher prices than they could under competition, leading to greater profit. However, this arrangement is often unstable as firms have an incentive to cheat to gain an advantage over their competitors.

A market structure with a few dominant firms and significant barriers to entry. These firms are interdependent and aware of each other's actions, leading to strategic decision-making.

A scenario where firms in an oligopoly compete by setting prices for their products, potentially leading to price wars or strategic pricing adjustments.

A situation where two or more firms cooperate to maximize joint profits by setting prices or output levels in unison. This is often seen in oligopolistic markets but is generally illegal.

A game theory model illustrating the challenge of cooperation even when it's mutually beneficial. It highlights the incentive for individual players to act in their self-interest, even if it leads to a suboptimal outcome for all involved.

In an oligopolistic market, firms are hesitant to lower prices due to the risk of a price war, where everyone ends up losing. This concept reflects the fear of retaliation and the potential for a mutually destructive outcome.

A model in oligopoly where firms simultaneously choose their output levels, considering the output decisions of their rivals. The equilibrium occurs when no firm can increase its profits by unilaterally changing its output.

A model in oligopoly where one firm, the 'leader', sets its output level first, anticipating the reaction of the other firms, the 'followers'. The leader can gain an advantage by committing to its output level first.

In the Stackelberg model, the first mover (leader) has the advantage of influencing the reaction of the follower. By committing to a higher output level, the leader forces the follower to produce less, leading to higher profits for the leader.

A table that shows the profit (or payoff) for each firm based on their own and their competitor's pricing decisions.

A situation where firms are unable to negotiate or enforce binding contracts, forcing them to act independently.

Firms using subtle communication to signal a price increase, hoping others will follow.

A pattern where one firm leads by setting prices, and other firms follow suit.

The temptation for a firm to break a collusive agreement, hoping to gain market share and profits at the expense of competitors.

If both firms decide to charge the same price, they split the market and earn the same profits.

When both firms deviate from their collusive agreement, they face the consequences of competition, potentially lowering their profits.