Deck 25: Oligopoly

Question 1

Recurring fixed costs may lead to only one firm producing in a Cournot oligopoly model.

Answer 1

True
As fixed costs increase,the best-response functions drop to zero earlier -- eventually no longer crossing at the interior where both firms produce.(See end-of-chapter exercise 24.2.)

Question 2

In the presence of negative pollution externalities,it is more efficient to have Cournot competitors than Bertrand competitors.

Answer 2

False
It may be more efficient,or it may not.It depends on how big the externality is.If it is relatively small,the competitive outcome of p=MC under Bertrand competition is still more efficient than the Cournot outcome that restricts output too much.If the externality is large,the Cournot outcome might lie closer to the efficient output quantity.

Question 3

If two simultaneous move Bertrand price competitors have different constant marginal costs,then any price between their marginal costs could be a Nash equilibrium price.

Answer 3

True
So long as firm 1 prices just below firm 2 and below firm 2's MC,firm 2 is best responding by pricing just above firm 1.But firm 1 is best-responding only if it prices above its own MC.

Question 4

Suppose a single firm has constant marginal cost and faced the demand curve
a.Illustrate in this graph how a monopolist who cannot price discriminate would price this good.What is the monopoly price and quantity?
b.Suppose two firms with the same marginal cost as the monopolist operated in this market instead.Suppose quantity is the strategic variable and the two firms simultaneously choose quantity.On a graph with firm 1's output on the horizontal and firm 2's output on the vertical,illustrate firm 2's best response function with numerical labels for each intercept.
c.Add firm 1's best response function and determine the Nash equilibrium quantities.
d.What's the equilibrium price resulting from the quantities you determined in (c)?
e.What would be the equilibrium price if the strategic variable for the firms were price instead?

Question 5

In a 2-firm oligopoly,if you can choose to either be a simultaneous move Cournot competitor or a Stackelberg leader,you will always choose to be a Stackelberg leader.

Question 6

Suppose two Bertrand price competitors have different constant marginal costs.In any simultaneous move Nash equilibrium,only the lower cost firm will produce.

Question 7

So long as production in the oligopoly still occurs,recurring fixed costs have no impact on output under Cournot competition but do have an impact under Bertrand competition.

Question 8

Suppose a market is currently served by an incumbent firm.If a potential entrant can enter prior to the incumbent firm announcing its output (or price),the entrant will enter the market and force the incumbent to compete.

Question 9

Explain why firms in a cartel might lobby for government regulation.

Question 10

Firms in a cartel have an incentive to cheat on the cartel agreement because they suspect the other firms are cheating as well.

Question 11

If Bertrand price competitors incur recurring fixed costs,it will still be a Nash equilibrium for price to equal marginal cost.

Question 12

If two firms in an oligopoly produce undifferentiated products and face identical constant marginal costs,then,absent any implicit or explicit collusion,they will price at marginal cost regardless of whether they move sequentially or simultaneously -- assuming price is the strategic variable.

Question 13

Suppose a market is currently served by an incumbent firm.If a potential entrant can enter prior to the incumbent firm announcing its output (or price),the incumbent cannot deter entry through its actions.

Question 14

The more firms there are in an oligopoly in which the strategic firm variable is quantity,the more price converges to marginal cost.

Question 15

Suppose that a market is currently served by a single firm protected by high entry costs from any potential competition.Then imagine fixed entry costs gradually falling in a model where any competition will be with quantity as the strategic variable.Describe how you would expect output price to evolve as entry costs fall.

Question 16

Explain how two Bertrand price competitors can price above marginal cost in an infinitely repeated game setting.

Question 17

Just because a firm can deter entry by a competitor does not mean it will deter entry.

Question 18

Two firms in an oligopoly can always do better if one firm buys the other.

Question 19

We showed that,when demand is linear and marginal cost is constant,the Stackelberg leader produces the monopoly output while the Stackelberg follower produces half the monopoly output.If the leader and follower now enter a simultaneous quantity setting game,why can't the leader maintain the same equilibrium?