Econ Chapter 13 Oligopoly pt 2
monopolistically competitive firms have the market power because they face downward sloping demand curves, as do oligopolistic firms. however in contrast to oligopolistic markets in which entry is very difficult, firms can
freely enter a monopolistically competitive market, so firm can earn zero economic profit, as do perfectly competitive firms
the larger each firms fixed cost, the smaller the number of monopolistically competitive firms
in the market equilibrium
the nash-bertrand equilibrium when firms produce identical products
is the same as the price-taking, competitive equilibrium
when firms move simultaneously, the warning of a firm producing a large quantity
isn't a credible threat
the Bertrand model appears inconsistent with actual oligopolistic markets in at least two ways
1. Bertrand competitive equilibrium price is implausible. because oligopolies typically charge a higher price than competitive firms, the nash cournot equilibrium is more plausible. 2. the bertrand equilibrium price, which only depends on cost, is insensitive to demand conditions and the number of firms, whereas cournot is the opposite
two conditions hold in a long run monopolistically competitive equilibrium
1. marginal revenue equals marginal cost because firms set output to maximize profit and 2. price equals average cost, that is- profit equals zero because firms enter until no further profitable entry is possible
Nash-Bertrand equilibrium
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
the differences between the cournot, stackelberg, and price-taking market structures shrink
as the number of firms grows
the fewer the monopolistically competitive firms the less
elastic the resdiual demand curve each firm faces
firm 1 will only undercut if its rival's price is higher than
firm 1's marginal and average cost of $5. if firm 2 chargers less than $5, firm 1 chooses not to produce
betrand best response curves slop upward indicating that a firm charges a higher price the higher the
price its rival charges
Stackelberg Oligopoly
the leader predicts what the follower will do before the follower acts, the leader manipulates the follower, benefiting at their expense.
minimum efficient sale
the smallest quantity at which the average cost curve reaches its minimum. quantity at which the firm no longer benefits from economies of scale
in this Nash-Stackelberg equilibrium, the leader produces
twice as much as the follower
it does not pay for either firm to change its price as long as the other charges $5 so e is the nash-Bertrand equilibrium. each firm makes
zero profit