Oligopoly Models Overview
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Questions and Answers

What is the name of the model of oligopoly that uses a kinked demand curve model?

Sweezy model

What is the term used to describe the type of prices that change infrequently?

Sticky prices

Which demand curve is more elastic in the Sweezy model? (Choose one)

  • Steeper demand curve
  • Flatter demand curve (correct)

    • In the Sweezy model, competitors match price increases but do not match price decreases.

    <p>False</p> Signup and view all the answers

    How does the slope of the marginal revenue curve relate to the slope of the inverse demand curve?

    <p>The slope of the marginal revenue curve is twice the slope of the inverse demand curve.</p> Signup and view all the answers

    What does the kink in the marginal revenue curve correspond to?

    <p>Sticky price</p> Signup and view all the answers

    What happens to the total revenue of a firm when it lowers its price in the Sweezy model?

    <p>The total revenue increases due to an inelastic demand.</p> Signup and view all the answers

    What is the primary reason why a firm in the Sweezy model chooses to keep its price constant despite changes in costs?

    <p>Due to potential decrease in total revenue from price changes.</p> Signup and view all the answers

    What is the relationship between the firm's output and its marginal cost when the firm is at its maximum output?

    <p>The maximum output of the firm corresponds to the intersection of the marginal cost and marginal revenue curves.</p> Signup and view all the answers

    A change in the firm's output can affect the maximum output in the Sweezy model.

    <p>False</p> Signup and view all the answers

    Changes in costs impact the firm's price in the Sweezy model.

    <p>False</p> Signup and view all the answers

    Why does the firm keep its prices constant even with changing costs?

    <p>Because the firm operates on the flat portion of its demand curve.</p> Signup and view all the answers

    What is the defining feature of a Cournot model?

    <p>The Cournot model is a model of oligopoly where firms compete on quantity.</p> Signup and view all the answers

    What is the term for function that calculates the optimal quantity of output produced by each firm in a Cournot model?

    <p>The term for function that calculates the optimal quantity of output produced by each firm in a Cournot model is called the reaction function.</p> Signup and view all the answers

    What are the key steps to solving a Cournot model?

    <p>The key steps to solving a Cournot model involve finding the reaction function, optimal output, total revenue, total cost, and finally the profit for each firm.</p> Signup and view all the answers

    What is a duopoly?

    <p>A duopoly is a market structure where two firms dominate the market share.</p> Signup and view all the answers

    What does the inverse demand function represent?

    <p>The inverse demand function represents the relationship between the price of a product and the quantity demanded at that price.</p> Signup and view all the answers

    What are the two important values required for solving the Cournot model?

    <p>The two important values required for solving the Cournot model are the inverse demand function and the marginal cost.</p> Signup and view all the answers

    What does the inverse demand function in the example of a duopoly represent?

    <p>The inverse demand function for the duopoly example represents the relationship between the total quantity of Coke and Pepsi sold in the market and the price of a can of soda.</p> Signup and view all the answers

    What are the next steps in solving the duopoly model after determining the inverse demand function?

    <p>The next steps in solving the duopoly model involve finding the individual reaction functions for each firm, calculating the optimal output level, total revenue, and profit for each firm, and finally determining the industry output, price, and profit.</p> Signup and view all the answers

    What characterizes a Stackelberg model?

    <p>The Stackelberg model is a dynamic model of duopoly where one firm acts as a leader who commits to a certain level of output first and the other firm acts as a follower.</p> Signup and view all the answers

    What is the difference between the follower and the leader in a Stackelberg model?

    <p>In a Stackelberg model, the leader makes its output decision first, which influences the follower's output choice. The follower observes the leader's production quantity and makes their output decision based on this information.</p> Signup and view all the answers

    How do the steps in solving a Stackelberg model differ from solving a Cournot model?

    <p>Unlike the Cournot model where firms choose outputs simultaneously, the Stackelberg model first calculates the leader's optimal output by setting the leader's marginal revenue equal to its marginal cost, then the follower's quantity is calculated by taking the leader's quantity as a given. The follower's reaction function is used to solve for its optimal output based on the leader's decision.</p> Signup and view all the answers

    What is a cartel?

    <p>A cartel is a group of firms that formally work together to coordinate their output and pricing decisions.</p> Signup and view all the answers

    What is collusion?

    <p>Collusion is the practice of firms cooperating to reduce output and charge higher prices in order to maximize profits.</p> Signup and view all the answers

    Cartels are typically found in industries with elastic demand.

    <p>False</p> Signup and view all the answers

    What are the key problems associated with cartels?

    <p>Cartels face challenges such as being illegal in most countries, making it difficult to coordinate between members and the constant risk of one members cheating the cartel to gain more profit for themselves.</p> Signup and view all the answers

    How does the output of a cartel compare to a monopoly?

    <p>The output produced by a cartel is the same as the output produced by a monopoly.</p> Signup and view all the answers

    What is the Bertrand model?

    <p>The Bertrand model is a model of oligopoly where firms compete fiercely on price, ultimately driving their prices down to their marginal cost. The outcome in the Bertrand model is thus closer to perfect competition despite a low number of firms in the market.</p> Signup and view all the answers

    What characterizes a Contestable Market?

    <p>A Contestable Market is a market where entry and exit barriers are significantly low, allowing new firms to easily enter if a profit opportunity arises. This leads to a situation where firms can't earn long-term profits as competitors can easily challenge them.</p> Signup and view all the answers

    All firms in a contestable market have access to the same information.

    <p>True</p> Signup and view all the answers

    Existing firms in a contestable market can quickly lower their prices to prevent new entrants.

    <p>False</p> Signup and view all the answers

    Contestable markets have sunk costs associated with entering the market.

    <p>False</p> Signup and view all the answers

    Firms in a contestable market have market power.

    <p>False</p> Signup and view all the answers

    Firms in a contestable market can charge prices above their marginal cost.

    <p>False</p> Signup and view all the answers

    In a contestable market, economic profits can exist in the long run.

    <p>False</p> Signup and view all the answers

    Study Notes

    Oligopoly Models

    • Sweezy Model (Kinked Demand Curve): Products/services are differentiated, prices are sticky (infrequently change). Competitors react to price changes, keeping prices fixed. If one firm cuts prices, competitors usually match. If one firm raises prices, competitors won't follow, causing a steep demand curve. A "kink" emerges, leading to price rigidity. More elastic demand means a flatter curve.

    • Cournot Model (Duopoly): In this model of a duopoly (two firms), each firm anticipates its competitor's output when deciding its output level. This creates a reaction function. The market inverse demand function is used to determine price based on total output (from both firms).

    • Bertrand Model (Duopoly): This model assumes firms compete in prices. The reaction function for each firm is to produce at prices as low as possible to attract customers.

    • Stackelberg Model (Duopoly): One firm is a leader, the other a follower. The leader assumes the follower will adjust to its actions. The leader's output determines the follower's output. This model of duopoly analyzes the outcome.

    Contestable Markets

    • Contestable markets: all players have equal access to the market—information, resources. Existing and new firms can enter and leave easily with no barriers to entry and exit.
    • In a contestable market, firms have no market power. No significant barriers are present, to entry.
    • If firms earn economic profits, competitors enter until firms earn zero economic profits because the existing firms may not be able to maintain high prices due to competition.

    Cartel

    • Cartel: A group of companies that collude to manipulate supply or prices to increase profits.
    • Collusion: When firms agree to limit output and raise prices.
    • Often found in situations where there is inelastic demand, meaning a price change doesn't greatly impact demand. Example, OPEC (Organization of the Petroleum Exporting Countries).
    • There are often issues with cartelization because there is an incentive for members of the cartel to cheat and create more product than agreed upon to gain market share and profits, thus breaking up the cartel or preventing it from forming in the first place.

    General Concepts

    • Homogeneous products: Products that are identical across firms.
    • Differentiated products: Products that are slightly different across firms.
    • Barriers to entry: Obstacles that prevent new firms from entering the market.
    • Sunk costs: Costs that are unrecoverable.
    • Marginal Revenue (MR) Curve: The change in total revenue that results from an additional unit sold relative to the marginal cost(MC). A key relationship in finding profit maximization for different firm structures.
    • Monopoly: One firm dominates the market.
    • Perfect Competition: Many firms, homogeneous products.

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    Chapter 9: Oligopoly Models PDF

    Description

    This quiz explores key models of oligopoly including the Sweezy, Cournot, Bertrand, and Stackelberg models. Understand the characteristics of each model and their implications on pricing and competitive strategies in markets with limited competition. Test your knowledge on how these models operate and the reaction functions of firms within an oligopolistic market structure.

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