Name some different forms of imperfect competition.
Imperfectly competitive markets have characteristics between those of perfectly competitive and monopolistic markets. Oligopolies and monopolistic competition are two examples of imperfectly competitive markets.
Define Nash equilibrium. Why do firms in oligopoly situations reach Nash equilibria?
Nash equilibrium is an equilibrium in which each firm does the best it can conditional on the actions its competitors take. Since oligopolies are in a stable equilibrium where no firm wants to change its behavior when it learns of its competitors’ market behavior, we say that oligopolies reach a Nash equilibrium.
Why are collusions and cartels often unstable?
A member of a cartel often has a strong incentive to cheat on its collusive agreement to gain more of the market and thus increase its profit. As a result, cartels are extremely unstable.
What is the market equilibrium in Bertrand competition with identical goods?
The market outcome of Bertrand competition is identical to that of perfect competition: At equilibrium, price equals marginal cost and quantity equals the competitive market quantity. This is because all firms have a strong incentive to continue to cut prices to gain more of the market. Firms will continue to slash prices until all firms charge a price equal to the marginal cost of production.
Contrast Bertrand and Cournot competition. Why do they reach different market equilibria?
459
Firms in Bertrand competition set their prices simultaneously. In contrast, firms in Cournot competition choose quantities simultaneously, and sell their products at the same market price. As a result, the equilibrium in Bertrand competition is the result of price cutting; as we saw in Question 4, this outcome is equivalent to the perfectly competitive equilibrium. The Cournot equilibrium is based on quantity decisions, and firms in Cournot competition are in equilibrium at the point where their reaction curves intersect.
What does the residual demand curve tell us about a firm’s output in Cournot competition?
The residual demand curve gives the demand remaining for a firm’s output given its competitor firms’ outputs.
How can reaction curves be used to find a firm’s equilibrium in Cournot competition?
In Cournot competition, the reaction curve shows a firm’s best production response to its competitor’s possible quantity choices. The Cournot equilibrium occurs at the intersection of the two firms’ reaction curves.
What causes the first-
Unlike in Cournot competition, firms in Stackleberg competition do not choose quantities simultaneously but instead choose sequentially. As a result, the firm that chooses first has the first-
Contrast the market equilibria in Betrand competition with identical products and with differentiated products.
Firms in a Bertrand market with differentiated products hold some market power. As a result, they can price above the perfectly competitive market price that Bertrand oligopolies with identical products face in equilibrium.
What are the characteristics of a monopolistically competitive firm?
Three primary characteristics mark a monopolistically competitive firm:
Firms sell differentiated products that consumers do not consider perfect substitutes.
Other firms’ choices affect a firm’s residual demand curve. However, the firm makes production decisions ignoring the interactions between its own quantity or price choice and its competitors’.
As with a perfectly competitive market, there is free entry into the market.
When will firms enter a monopolistically competitive industry? At what point will firms stop entering a monopolistically competitive industry?
Firms will enter a monopolistically competitive market when firms in the market earn positive economic profits. Entry will continue until economic profits are driven to zero.
Why do firms in monopolistic competition not reach the perfectly competitive equilibrium?
Firms in monopolistic competition are not price takers, but instead face a downward-