Cournot & Bertrand Oligopoly Models

Flashcards summarizing key concepts from a lecture on Cournot and Bertrand Oligopoly Models.

How do firms behave in the business world?

Firms behave strategically as they compete, adopting competitive strategies to secure a larger market share and enhance profitability.

What is the role of game theory in analyzing firms' strategic decisions?

Game theory is used to analyze firms’ strategic decision-making, particularly how oligopolistic firms (duopoly) behave within a game.

What are the four main assumptions of the Cournot model?

Two firms, identical costs, identical (homogeneous) products, firms set quantities simultaneously.

Give an example of the Cournot model.

Liverpool and United airlines competing for customers on flights between London and Paris, where other firms cannot enter due to landing rights.

What is a 'best response' in game theory?

Best response is the strategy that maximizes a player’s payoff given its belief about its rival’s strategies.

What is the Nash equilibrium in the Cournot model?

A set of quantities chosen by firms such that no firm can obtain higher profit by choosing a different quantity, holding the quantities of other firms constant.

What is the formula for a residual demand function, Dr(p) ?

Dr(p) = D(p) − So(p).

In the mathematical example of airlines, what is Liverpool's best-response function?

qL = 96 − (1/2)qU

How are Nash-Cournot equilibrium quantities obtained and what are the equilibrium quatities?

Solving the best-response function, qL = qU = 64.

In the airline example, what is the market output,price and Liverpool's profit?

Output: 128; Price: £211; Liverpool’s Profit: £4,096.

What happens to the Cournot model if Liverpool and United airlines merge or collude?

Switch to a monopoly analysis.

What is the purpose of competition laws?

Antitrust or competition laws prevent firms from colluding; governments limit mergers to prevent monopolies.

What are the assumptions of the Bertrand Model?

Two firms producing a homogeneous product, constant marginal and average costs, firms choosing prices simultaneously, and sales going to the firm with the lowest price.

Summary of the lecture.

Businesses factor in competitor behavior, competitive markets increase output and lower consumer prices, and governments regulate anti-competitive practices.