Lecture 21: Oligopoly, Stackleberg, Kinked Demand

with the Cournot equilibrium, what is the power difference?

there is not power difference

Stackleberg equilibrium

a situation where there is a dominant firm that makes decisions irrespective of the follower

how do you solve for Stackleberg?

you insert the follower’s reaction equation (found by the same process as cournot) into the leader’s profit function then take the derivative with respect to the leader’s variable

what is the consumer ranking for oligopolies?

bertrand, stackleberg, cournot, cartel

what are the assumptions of the kinked demand curve?

1. price reduction by one firm is met by competitors dropping their price

2. price increase by one firm is not met by competitors following

the portion above (to the left) of P* is

elastic

the portion below P* (to the right) is

inelastic

how do consumers react to oligopoly firms increasing their price?

consumers will decrease their consumption significantly because there are close substitutes

how do consumers react to oligopoly firms decreasing their prices?

they increase their consumption only slightly because other firms will follow in the price reduction

the MR curve on the kinked demand curve has a

vertical gap

when the MC falls in the vertical gap, what price will firms charge

P* (the point where the demand curve kinks