Oligopoly
What is the difference between a discrete and continuous Bertrand case?
Discrete: a limited set of price levels, best response is to undercut the other firm's price
Concrete: firms set any level of price, best response is a mapping for each price of the other firm
What is one major difference between the Cournot and Bertrand Model?
Bertrand: firms make price decisions. Also, prices will be close to or equal to MC
Cournot: firms make output decisions. Prices will be above MC but below the monopoly price
What are grim strategies?
How to avoid the Bertrand trap, and explain briefly. (name at least 3)
- Product differentiation: competition will no longer drive down MC
- Dynamic competition: Possibility of retaliation only promises increased market demand in the SR
- Asymmetric costs: different MC imply different profits
- Capacity constraints
What stops firms from colluding (more often)? Name at least 3 reasons and give a brief explanation
- Antitrust policy: collusions and cartel agreements are illegal
- In industries with high turnover rates, the incentive to deviate from a collusive agreement is high as there is little to lose
- Possibility of secret price cuts: not all prices can be observed
- The proposed Nash equilibrium is unrealistic as it ignores that firms can negotiate a new agreement after a price war (cheating can be profitable)
What are favourable (market) conditions for collusive agreements?
Few similar competitors, firms competing in more than one market
How do the Oligopoly equilibria differ between Bertrand and Cournot?
With Bertrand p = MC and p>MC with Cournot
How would an appreciation of the Euro affect the Cournot equilibrium between a Dutch and a Chinese firm competing in Europe?
With the appreciation, the MC for the Chinese firm would increase in terms of Euro. Consequently, the firm's reaction curve will shift up.
Under which conditions is collusion more likely to exist?
Relates to the discount factor:
- When firms interact frequently
- Industry continuation is high
- Industry growth is high