12.1 Monopolistic Competition and Oligopoly

Why does price leadership sometimes evolve in oligopolistic markets? 1) Price leadership sometimes occurs in oligopolistic markets because 2) Explain how the price leader determines a profit-maximizing price. The profit-maximizing price is the price that results from

1) Coordinating prices* is difficult. * with legal means other than price leadership 2) a dominant firm producing where marginal cost equals marginal revenue from demand after subtracting other firm's supply.

1) What do the Cournot and Bertrand model have in common? The Cournot and Bertrand model have in common that 2) What is different about the two models? The Cournot and Bertrand model are different in that

1) Forms produce a homogeneous good 2) firms earn positive economic profits under the Cournot model, but earn zero profits under the Bertrand model

What are the characteristics of a moralistically competitive market? 1) Degree of substitution among products is 2) Entry and exit is 3 Type of product: II) What happens to the equilibrium price and quantity in such a market if one firm introduces a new, improved product?

1) High 2) Free 3) Differentiated II) The demand curve for each of the other forms shifts inwards, reducing the price and quantity received by those incumbents.

Why is the Cournot equilibrium stable? (i.e. Why don't forms have any incentive to change their output levels once in equilibrium) 1) At the Cournot equilibrium, firms have no incentive too change their output levels because 2) Even if they can't collude, why don't firms set their output at the joint profit-maximizing levels? (i.e. the levels they would have chosen had they colluded)

1) each firm is producing the amount that maximizes its profit given what its competitors are producing. 2) each firm would have an incentive to increase output to increase profits at the expense of the other firm

Suppose all firms in a monopolisitcally competitive industry were merged into one large firm. 1) Would that new firm produce as many different brands? 2) Would it produce only a single brand? Explain

1) fewer brands to distinguishes remaining products. 2) might not produce a single brand to price discriminate

Explain the meaning of a Nash equilibrium when firms are competing with respect to price. 1) When firms are competing with respect to price, a Nash equilbibrium indicates 2) Why is the equilibrium stable? A Nash equilibrium where firms chose price is stable because 3) Why don't the firms raise prices to the level that maximizes joint output? When competing with respect to price, they do not raise prices to the level that maximizes joint profits because

1) firms cannot change their price to increase profits 2) a firm would lose money on output sold if they lower their price. 3) a firm would lose all of their customers if they raise their price.

Some experts have argued that too many brands of breakfast cereal are on the market. Give an argument to support this view. 1) With too many brands of breakfast cereal on the market, 2) Give an argument against this view

1) firms produce with excess capacity 2) Consumer enjoy product variety

The kinked demand curve describes price rigidity. Explain how the model works. 1) According to the kinked demand curve model, each firm faces a demand curve that is 2) What are its limitations? The kinked model curve model 3) Why does price rigidity occur in oligopolistic markets? Price rigidity occur in oligopolistic markets because

1) less elastic for price decreases than price increases. 2) cannot explain how the kinked price is determined. 3) firms want to avoid destructive price wars.

Why has the OPEC oil cartel succeeded in raising prices substantially while the CIPEC copper cartel has not? 1) The OPEC has been successful relative to the CIPEC copper cartel because. 2) What conditions are necessary for successful cartelization? One condition necessary for cartelization is 3) What organizational problems must a cartel overcome? To be successful a cartel must

1) the demand for oil is relatively inelastic. 2) the cartel must control supply. 3) have a mechanism to enforce agreements.

Suppose that two competing firms, A and B, produce a homogeneous good. Both firms have a marginal cost of MC=$50. Describe what would happen to output and price in each of the following situations if the firms at the (i) Cournot equilbrium (ii) collusive equilibrium, and (iii) Betrand equilbrium. Firm A must increases wages, increasing marginal cost to $70. (i) At the the Cournot equilbrium, a) the quantity produced by Firm A will [ ] b) the quantity produced by Firm B will [ ] c) the total quantity produced will [ ] d) and the market price will [ ] (ii) collusive equilibrium a) the quantity produced by Firm A will [ ] b) the quantity produced by Firm B will [ ] c) the total quantity produced will [ ] d) and the market price will [ ] (iii) Betrand equilbrium. a) the quantity produced by Firm A will [ ] b) the quantity produced by Firm B will [ ] c) the total quantity produced will [ ] d) and the market price will [ ] INSTEAD, suppose the marginal cost of BOTH firms decrease. (i) At the the Cournot equilbrium, a) the quantity produced by Firm A will [ ] b) the quantity produced by Firm B will [ ] c) the total quantity produced will [ ] d) and the market price will [ ] (ii) collusive equilibrium a) the quantity produced by Firm A will [ ] b) the quantity produced by Firm B will [ ] c) the total quantity produced will [ ] d) and the market price will [ ] (iii) Betrand equilbrium. a) the quantity produced by Firm A will [ ] b) the quantity produced by Firm B will [ ] c) the total quantity produced will [ ] d) and the market price will [ ]

Firm A must increases wages, increasing marginal cost to $70. (i) Cournot equilbrium, a) decrease b) increase c) decrease d) increase (ii) collusive equilibrium a) decrease b) increase c) not change d) not change (iii) Betrand equilbrium. a) decrease b) increase c) decrease d) increase marginal cost of BOTH firms decrease. (i) Cournot equilbrium, a) increase b) increase c) increase d) decrease (ii) collusive equilibrium a) increase b) increase c) increase d) decrease (iii) Betrand equilbrium. a) increase b) increase c) increase d) decrease

Why is the firm's demand curve flatter than the total market demand curve in monopolistic competition?

It is easier for consumers to switch to another firm's product than to switch to a product from another market.

When monopolistically competitive firms make a profit a profit in the short-run, then in the long-run, their demand curve will

shift left as new firms enter

In the Stackelberg model, the firm that sets output first has an advantage. Explain why. The firm that sets output first (the leader) in the Stackelberg mode has an advantage because

the firm that moves second must accept the leader's output as given.