ECON 230D2 Ch 13 - Oligopoly & Monopolistic Competition
Two firms
Each firm has own objective: maximize their own profits; EQUILIBRIUM
Markets differ according to:
-The number of firms in the market -The ease with which firms may enter and leave the market and - The ability of firms in a market to differentiate their products from those of their rivals.
Nash equilibrium
If holding the actions of all other firms constant, no firm can obtain a higher profit by choosing a different action.
Cartels persist despite these laws for 3 reasons:
1) International cartels and cartels within certain countries operate legally. 2) Some illegal cartels operate believing that they can avoid detection or that the punishment will be insignificant. 3) Some firms are able to coordinate their activity without explicitly colluding and therefore without breaking competition laws.
What are the 2 conditions in a long-run monopolistically competitive equilibrium?
1) MR = MC (bc firms set output to maximize profit) 2) Price (approaches or) equals AC (bc firms enter until no further profitable entry is possible)
The Duopoly Nash-Cournot Equilibrium 4 assumptions
1) The market has a small number of firms (e.g. 2), and no other firms can enter. 2) The firms set their quantities independently and simultaneously. 3) The firms have identical costs. 4)The firms sell identical product
3 steps Cournot equilibrium or Nash-Cournot Equilibrium
1) determine the residual demand facing a firm 2) determine the best response function of a firm 3) given all firms' best response functions determine the Nash-Cournot equilibrium quantities
2 reasons why cartels fail
1)Cartel size relative to the industry is small 2) Each member of a cartel has an incentive to cheat on the cartel agreement.
Cartel
A group of firms that explicitly agree to coordinate their activities.
Monopolistic competition
A market structure in which firms have market power but no additional firm can enter and earn positive profits
Cournot equilibrium or Nash-Cournot Equilibrium
A set of quantities chosen by the firms such that, holding the quantities of all other firms constant, no firm can obtain a higher profit by choosing a different quantity.
Oligopoly
A small group of firms in a market with substantial barriers to entry.
Maintaining Cartels
Cartels must be able to 1) detect cheating and punish violators 2) Keep the agreement hidden from government antitrust authorities.
3 models of Oligopoly and the 3 assumptions
Cournet model Stackelberg model Bertland model Assumptions 1) All firms are identical 2) Duopoly (2 firms only) 3) The market lasts for only one period. Each firm chooses its quantity or price only once
Bertrand Versus Cournot When firms produce identical products and have a constant marginal cost, how much profits do they make if they are in Bertrand? Cournot?
Cournot: -Firms receive positive profits and the price is above marginal cost Bertrand: Firms earn 0 profits and P=MC.
Single firm
One objective: maximize profits; this is called an OPTIMUM
KNOW 13.2 EXAMPLE FOR MIDTERM!!! slide 29
PLS
The number of firms in a monopolistically competitive equilibrium depends on firms' costs.
The larger each firm's fixed cost, the smaller the number of monopolistically competitive firms in the market equilibrium
Residual demand curve
The market demand that is not met by other sellers at any given price
Why is moving sequentially so important in a Stackelbery?
When the firms move simultaneously, United doesn't view American's warning that it will produce a large quantity as a credible threat. If United believed that threat, it would indeed produce the Stackelberg follower output level
In a Cournot model, do both firms make their output decisions at the same time?
Yes
Bertrand equilibrium
a Nash equilibrium in prices; a set of prices such that no firm can obtain a higher profit by choosing a different price if the other firms continue to charge these prices. Bertrand equilibrium outcome depends on whether firms are producing identical or differentiated products.
