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