Oligopoly and Market Models

This set of flashcards covers key concepts and definitions associated with oligopoly and various market models, including Cournot, Bertrand, and Stackelberg.

What is the definition of oligopoly?

Market structure where a few firms' pricing and output decisions interdependently affect each other.

How does oligopoly differ from monopoly?

Monopoly has one firm with sole market power; oligopoly has a few interdependent firms.

What is the difference between oligopoly and perfect competition?

Perfect competition has many price-taking firms; oligopoly has few firms with strategic interaction.

What is the model assumption of the Cournot model?

Firms simultaneously choose output, taking rivals' outputs as given.

What is the equilibrium output per firm in the Cournot model?

qn = 2θ/3, where θ = (α − c)/β.

How is total industry output calculated in the Cournot model?

Qn = 4θ/3.

What is the inverse demand function in the Cournot model?

p = α − βQ, where Q is total industry output.

What is the firm profit function in the Cournot model?

πi = (α − β(qi + qj))qi − cqi.

What is the first-order condition in the Cournot model?

∂πi/∂qi = α − c − 2βqi − βqj = 0.

What is the reaction function in the Cournot model?

qi* = (α − c)/(2β) − (qj)/2.

What does the Cournot model's output ranking indicate?

qm < qn < qc.

What is the significance of the Bertrand paradox?

With ≥2 firms, price equals marginal cost.

What is the equilibrium price in the Bertrand model?

pc = c.

What is the outcome of the Bertrand model compared to the Cournot model?

Bertrand yields lower prices and higher welfare than Cournot.

What does the Stackelberg model describe?

Sequential output setting: leader moves first, follower observes.

What is the first-mover advantage in the Stackelberg model?

Leader earns more profit than follower.

What is the definition of collusion in the Collusion model?

Agreement among firms to maximize joint profits by restricting competition.

What is the purpose of side-payments in collusion?

Transfer profits to align incentives for collusion.

What does the grim trigger strategy involve?

Permanent punishment strategy after any deviation.

What is Nash equilibrium?

No firm gains from unilateral deviation.

What is the best response in terms of strategies?

Strategy maximizing payoff given rivals' actions.

What does present value of profit represent in the Repeated model?

Vi = Σ δ^t π_it.

How is the present value calculated?

PV = Σ δ^t Xt.